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  (Source: Toxel)
So far WP7 has been a sales dud, but if Microsoft pours enough money into the well, something might come out

You win some, you lose some they say.  Microsoft Corp. (MSFT), a company known for its history of "winning" in the OS and gaming market, has begrudgingly been forced to accept losses in the internet and smartphone sectors.  The company recently announced that its Bing search engine, which lost some of its small market share in 2011, may never turn a profit.  

I. From 23 Percent Down to 2 Percent: The Sordid WP7 Development Cycle

It's a similar story for Windows Phone 7.  Next Friday, the platform will celebrate its first year on the market (or a year since the EU product launch -- NA sales began in November).  But sales have languished and the public still remains largely unaware and uiniterested in buying a Microsoft smartphone.

Back in 2004, Microsoft had planned a major rewrite of its Windows Mobile operating system which it dubbed "Photon".  Microsoft at the time somewhat recognized that mobile devices were transitioning from business tools to entertainment devices.  And owning almost a quarter of global smartphone sales, it was well-positioned to drive the future.

Windows Mobile
Windows Mobile once had almost a quarter of the global smartphone market, but Microsoft let its strong position slip away thanks to slow OS development. [TechViva]

But Photon languished in development and the product was scrapped.  By 2007 Finland's Nokia, Oyj. (HEL:NOK1V) and America's Apple, Inc. (AAPL) had launched slick touch-screen entertainment-minded smartphones.  Suddenly Windows Mobile looked very dated.

Microsoft vowed to act.  In 2008 it shook up its mobile group and activated what would become the Windows Phone unit.  But again, development was slow.  

At the same time in 2008 Google Inc.'s (GOOG) rival smartphone bid started to heat up.  In late 2008 and early 2009 rival Android hardware had started to trickle onto the market.  By 2010, it was hitting its stride, showing off superior customizability to Apple's much beloved iPhone, and showing off a broader selection, which included handsets with faster processors and superior cell modems to the iPhone.

The war was shaping up to be Apple versus Google, with Microsoft looking increasingly like an afterthought.  Microsoft's new mobile team had pushed out a stopgap release (Windows Mobile 6.5) in 2009, but it still had no modern smartphone product.

Over the course of 2010 it finally inched closer to the market.  And what it would finally launch on October 21 was quite remarkable.

II. Microsoft Delivers a Slick Product -- But No One Notices

Windows Phone 7 debuted in remarkable form showing an interface which -- to many's surprise -- did not imitate Google or Apple's operating systems.  Rather it was a slick animated tile driven Metro UI that presented dense information to the user in a colorful, inviting format.

Despite Microsoft's imaginative approach, Windows Phone 7 languished in sales.  A big part of the problem was so-called "channel incentives".  At most American carriers sales staff get undisclosed commissions (bonuses) -- often directly from the device maker.  Device makers in turn get handed money by platform makers, to push certain operating systems.

To that end, Microsoft budgeted $400M USD to try to convince companies like Samsung Electronics (SEO 005930), LG Electronics (SEO:066570), and HTC Corp. (SEO:066570) to push incentives for sales people for Windows Phone 7 (this money was largely billed by the media as "advertising" funding, though it's not necessarily advertising in a traditional sense).

But according to early reports, Microsoft didn't end up giving out much cash.  

James Choi, marketing strategy and planning team director for LG Electronics told Pocket-Lint, "From an industry perspective we had a high expectation, but from a consumer point of view the visibility is less than we expected."

Typically smartphone sales are driven by three factors:

  1. In-store salespeople commissions
  2. Internet/TV ads
  3. Word-of-mouth consumer reactions
Microsoft had no real word-of-mouth as it was launching a completely new platform.  And some of its partners indicated that it was being too stingy when it came to funding commissions.  As a result, customers came into American phone carriers' stores and heard about all the great Android cell phones and the iPhone (which salespeople would receive incentives to sell), but Windows Phone 7 was left out of the disussion.

Verizon salesperson
Sales people didn't try to push Windows Phones as hard as they got less commissions on them.  Thus many buyers never learned about Microsoft's intriguing product. [AP Photo]

In short, Microsoft had a product that all its partners -- and many in the media -- seemed to agree was terrific, but nobody knew about it.

III. Microsoft is Putting Most of its Eggs in One Basket -- Nokia's to be Precise

So what's the future look like for Microsoft?  Well, last month a major OS update -- Mango -- rolled out.  According to market researcher Horace Dediu at asymco, there are now 27 Windows Phone 7 handsets and 11 Windows Phone 7.5 (Mango) handsets on the market.  That sounds like a lot, but sales haven't shown much gains -- yet.

That's partially because of the one major question mark for Microsoft that has gone unmentioned -- Nokia.

In February, Nokia announced that it would be dumping Symbian and adopting Windows Phone 7 globally as its smartphone OS.  In return Microsoft promised it over a billion dollars, reportedly, to drive sales commissions and advertising for the phones.

Nokia, at the time was the world's biggest phonemaker and Microsoft was languishing with less that 3 percent market share in the smartphone market -- a fall from once holding almost a quarter of the market in 2004.

Yet with all that money flying around, Nokia has been unable to launch a Windows Phone product in the eight months since.  Meanwhile Apple and the primarily Android phonemaker Samsung have zoomed past Nokia's dying Symbian platform in sales.

When Nokia product finally hits the market, Windows Phone 7 (or 7.5, more aptly) may finally start getting noticed.  Sales people will likely receive a pretty sweet bonus for every Nokia WP7.5 model they sell.  So naturally they'll plug the phone's impressive features.

That said Microsoft is coming to the game very late -- as is Nokia.  The pair represents two of the most opportunely positioned players to find success in the smart phone market, yet they've also been too of the most sluggish in terms of releasing hardware and software in a timely fashion.

Microsoft and Nokia
Windows Phone's next year should determine whether Nokia and Microsoft are a dream team or a nightmare. [Reuters]

Between the positives (promotional cash) and negatives (sluggish pace) it's hard to tell if Microsoft and Nokia is a dream team or a nightmare.  Over the next season we should find out.

Analysts like Mr. Dediu argue that Microsoft should see at least some marketshare.  But it's plans of bumping Apple to second place are met with some skepticism, given its performance thus far.

Writes Mr. Dediu:

[D]ependence on a complex value network means that products do not reach users quickly enough and when they do the marketing message is weak, even when backed by large budgets. The real problem with Microsoft’s approach is that it’s neither viral like Android (because it has a price and a contract associated with it) nor is it focused and agile like Apple’s. It seems to suffer from the worst aspects of modularity (market lag) without benefiting from the control over the ecosystem and end user experience that differentiates it.

Microsoft will muddle through but the 20% share that it says is "conservative" seems anything but.

In the end, that seems like a fair summary of the platform's ongoing struggles.

That said, Microsoft can at least sleep soundly at night as it's fast approaching its goal of receiving royalties on every Android smartphone sold [1][2].  That could help it break even, even as it gives away wads of cash to try to promote WP7.

Source: Asymco

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RE: Quite slick
By mcnabney on 10/13/2011 11:56:37 AM , Rating: -1
Everyone is missing the reason that WP7 failed.

The public just doesn't want more Microsoft.

They are stuck with it on their desktop/laptop, but they have real choices in the smartphone market. There is nothing wrong with WP7, but the public is collectively not in favor of letting Microsoft become dominant in the sector. Business users remembered how well MS supported Windows Mobile and didn't want to sign on to a platform that would end up the same way - no matter how good it might be to start. The rest of the market saw WP7 as what it was, a ME TOO attempt to get back in the game that offered all the negatives of Apple (walled garden) with mediocre at best hardware. Add the lack of an application portfolio and it is no wonder that nobody but the fanbois bought it (go ahead and rate me down if it will make you feel better).

A year ago I was thoroughly down-rated on this board for suggesting that WP7 will follow the path of Kin. It appears I was fairly accurate. The only difference is that Kin didn't cost MS 2+ billion dollars.

RE: Quite slick
By acer905 on 10/13/2011 12:19:16 PM , Rating: 5
Four words:
Have you tried it.

RE: Quite slick
By jabberwolf on 10/13/2011 12:32:43 PM , Rating: 2
I was going to say most that try it like it muc more than Android. Even IOS users who are nothing more than sheep, struggle to find something wrong, but cant. They go back to their iphone and look back with envy, then try to find an app that I might not have yet. Its kind of amusing.

But try one, its faster than android or IOS and doesnt need the cpu horsepower to run. MS actually did an excellent job of creating a new OS, and in the future, combining it with their Windows 8. i'm guessing when Windows 9 comes out, it will be 1 OS for all devices.

People use MS because they seem to be the only company that thinks about things in the long term and not sell to the eager sheep of today.

RE: Quite slick
By Arsynic on 10/13/2011 12:49:55 PM , Rating: 2
You're a fucking fanboy. This is probably the dumbest reason I've heard yet. You're applying your own biased fanboy reasoning to the general public.

The main reason WP7 is a failure is because MS isn't advertising it, the country's largest carrier ignores it and sales people just aren't pushing it. Once all three of these problems are solved, WP7 will take off because it's an exceptional OS. I just upgraded to iOS 5 and it's more of the same stale old shit.

RE: Quite slick
By acer905 on 10/13/2011 12:58:58 PM , Rating: 3
he main reason WP7 is a failure is because MS isn't advertising it, the country's largest carrier ignores it and sales people just aren't pushing it.

Even worse than that, the sales people are pushing people away from it. When I got my Arrive, I had 4 different sales reps try to push me over to one of the various Android phones. It didn't matter that I had actually researched the Arrive and knew more about it than they did. MS needs to get the sales reps to stop this, because complaints to the carriers haven't helped.

RE: Quite slick
By cjohnson2136 on 10/13/2011 1:54:03 PM , Rating: 2
The same thing happened to me. My question to the sales rep was have you tried the phone? The rep responded by saying it's just like WinMo 6.5. I then took the WinMo 6.5 phone next to it and showed it to her and then the Arrive. I was able to sell her the WP7 phone. She stands their all day selling phones and she not once tried the phone because of the rep that WinMo 6.5 has.

RE: Quite slick
By Labotomizer on 10/13/2011 8:03:55 PM , Rating: 2
Same problem at Verizon when I asked for the Trophy. They tried so hard to get me to buy Android despite the Droid 2 in my pocket that I despised. At first she told me they didn't have the phone, then told me it wasn't very good. I pulled up their website and showed her that it was one of the highest rated devices they have. I really really like this phone. Best phone I've owned without question, especially with 7.5.

RE: Quite slick
By TakinYourPoints on 10/13/2011 9:05:35 PM , Rating: 2
It is because hardware companies and carriers make more money selling Android handsets than they do Windows Phone 7 or iPhones.

Carriers get a free OS on hardware that they have control over. They make way more profit off of Android. I wouldn't have a problem with this if it wasn't for the fact that this approach leads to an inferior user experience than the other mobile OSes. It also leads to much weaker developer support than iOS or WP7 since there is poor consistency in hardware and which versions of Android are supported on what handset, there are lower sales on Android apps from those developers who do go cross-platform (more users means little if people don't actually buy), and a far inferior SDK. The ROI is not good.

The arrangement is good for carriers, bad for customers who don't go iOS or WP7. Unfortunately Google seems less concerned with a good user experience and development platform and are more concerned with having another platform to serve ads. It sucks because their other divisions like the Google Chrome team make top notch products.

RE: Quite slick
By Labotomizer on 10/13/2011 10:10:23 PM , Rating: 2
You're mistaken on cost, but not on freedom. The OEMs have to pay Google for access to Google services and most of them have to pay Microsoft as well. When you combine the two it costs more than WP7. Not to mention when they use the Microsoft Os they get licensing protection but Google leaves them to fend for themselves. Plus, the freedom is a double edged sword and is both Android's biggest strength and it's biggest weakness.

RE: Quite slick
By TSS on 10/13/2011 7:31:34 PM , Rating: 2
Does anybody else find it humerous that, of all the companies, microsoft's the one that forgets to bribe?

RE: Quite slick
By bupkus on 10/13/11, Rating: -1
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