(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

"A lot of people pay zero for the cellphone ... That's what it's worth." -- Apple Chief Operating Officer Timothy Cook

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