Microsoft-Built Smartphone Could Harm Nokia, Irritate Google

Microsoft CEO Steve Ballmer is betting that Windows Phone 8 will help make the company more of a player in smartphones.

Rumors have circulated for weeks that Microsoft intends to release a smartphone of its own design and manufacture, embracing the strategy that drove Apple’s iPhone to such enormous success over the past few years.

According to a Nov. 2 report in The Wall Street Journal, Microsoft is currently testing a design with a screen “between 4 and 5 inches,” but it’s unclear whether that specific prototype will reach mass production. The newspaper cited unnamed “people familiar with the situation” as its source.

While releasing a branded smartphone offers several potential benefits—look at the revenue and brand recognition Apple’s earned as a result of the iPhone—such a strategy also carries significant risks for Microsoft. Here are just a few:

It’ll Anger Hardware Partners. Really Anger Them.

Earlier this year, Microsoft unveiled its Surface tablet. The 10.6-inch device featured Windows RT, a version of Windows 8 for ARM-based processors, and a flexible keyboard that doubled as a cover. (A version of Surface with Windows 8 Pro, running on an Intel Core i5, is due early next year.) But the revolutionary thing about Surface wasn’t the specs—it was Microsoft’s decision to build a tablet in-house, with tight control over both hardware and software, rather than collaborate with a manufacturing partner.

While Microsoft had dabbled in hardware before—the Xbox and the ill-fated Kin phones come immediately to mind—it hadn’t done so in the context of its Windows franchise, which continues to drive a significant portion of the company’s bottom line. From the outset, the company knew that building its own tablet would likely irritate its manufacturing partners: “Our Surface devices will compete with products made by our OEM partners, which may affect their commitment to the platform,” read a passage in its annual Form 10-K filing with the Securities and Exchange Commission (SEC).

While hardware manufacturers haven’t risen up in outright rebellion against Surface—they have Windows 8 devices of their own to sell, not to mention long and profitable relationships with Microsoft—there have been very public indications of displeasure. “On one hand Microsoft is our partner, but on the other, Microsoft’s move makes them compete not only with us but all PC makers,” Acer spokesperson Henry Wang told Bloomberg Aug. 7. “We think that Microsoft’s launch of its own-brand products is negative for the whole PC industry.”

What does all this have to do with a Microsoft-built smartphone? If the company did release such a device, it would be a clear indicator that it intends to handle more and more of its own hardware. In which case, why not stop at tablets and smartphones? Why not simply start building flagship PCs, even if it means marginalizing some partners? It’s those kinds of thoughts that keep hardware executives—whose companies’ margins are already pretty weak—awake long into the night.

Apple and Google

Apple and Google split the smartphone world between them: research firm IDC recently estimated that Google Android accounted for 75 percent of the 181.1 million smartphones shipped in the third quarter of 2012, while Apple’s iOS owns 14.9 percent. That’s left their respective competitors to fight over the scraps: Research In Motion’s BlackBerry franchise owns a mere 4.3 percent of the market, while Nokia’s Symbian (largely abandoned in favor of Windows Phone) stands at 2.3 percent. Microsoft’s Windows Phone brings up the rear with 2.0 percent.

Despite millions in marketing dollars spent by Microsoft and its smartphone-manufacturing partners (many of whom also build Android devices), Windows Phone has clearly failed to become a significant threat to either iOS or Android. Most companies, confronted by 2.0 percent market-share after investing significant time and resources, would find a way to retreat gracefully from the battlefield. But not Microsoft: a branded smartphone would indicate the company plans to continue its sizable investment in mobile for the foreseeable future.

That’s not to say that Microsoft can become a formidable player in the smartphone arena simply by hanging around long enough. But even if it doesn’t seize a larger piece of the market-pie, Microsoft can remain a potential irritant to Apple and Google even as they continue to battle with each other; and if either Apple or Google slip up in some way, Microsoft will be there to fill at least a portion of the result vacuum.

Nokia

The majority of Microsoft’s smartphone partners don’t depend on Windows Phone for the majority of their revenue. Not so with Nokia, which abandoned its homegrown operating systems (including Symbian) in favor of Windows Phone.

In the short term, that hasn’t panned out terribly well for Nokia. Sales of Nokia’s Windows Phone devices dipped from 4 million units in the second quarter to 2.9 million units in the third. “In Q3, we continued to manage through a tough transitional quarter for our smart devices business,” Nokia CEO Stephen Elop wrote in an Oct. 18 statement, “as we shared the exciting innovation ahead with our new line of Lumia products.”

Nokia’s current slate of Windows Phone 7.x devices won’t be able to upgrade to Windows Phone 8, as a consequence of Microsoft’s decision to have the latter share a kernel, file system, graphics support, and other elements with Windows 8. With Windows Phone 7.x on a dead-end upgrade path, Nokia now depends on Windows Phone 8—and the perception that its Lumia devices with that OS version, including the high-end Lumia 920, are the “flagship” Windows Phones.

But if Microsoft releases its own branded smartphones, Nokia risks losing its shot at that “flagship” role. Reduced to the role of just another hardware manufacturer, with its Lumia line competing against a high-end device backed by Microsoft’s sizable marketing dollars, Nokia could find it that much harder to attract customers. And given the Finnish phone-maker’s already-perilous situation, that could prove ruinous.

Conclusion

Building its own Windows Phone smartphone might prove beneficial for Microsoft’s bottom line and prestige, but it could negatively affect its current partnerships.

 

Image: Microsoft

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