Bloomberg News

Microsoft’s $7.2 Billion Nokia Bet Not Luring Apps

October 09, 2013

Microsoft’s $7.2 Billion Nokia Bet Leaves Developers Cold

Ultimately, it comes down to where developers can make money -- and that’s not with Microsoft, said William Hurley, a co-founder of Chaotic Moon, a maker of apps for companiesincluding Walt Disney Co. Photographer: Paul Thomas/Bloomberg

Microsoft Corp. (MSFT:US)’s $7.2 billion pairing with Nokia Oyj (NOK:US)’s handset business is failing to win over the software developers who are crucial to its success.

Consider Tommy Palm and Jeff Smith. Palm, who oversees development at smartphone-game maker King.com, and Smith, who runs music-application maker Smule Inc., have long avoided building apps for devices using Microsoft’s Windows Phone software. Closer ties with Nokia haven’t swayed them. Both say even after the acquisition closes, Microsoft still won’t have enough users to make it worth the time and money.

“With or without Nokia, Microsoft needs to demonstrate that they can capture a material segment of the mobile market,” Smith said in an interview. “We will wait and see.”

While Microsoft has struggled to lure developers since Windows Phone debuted in 2010, the plight has taken on new urgency since Chief Executive Officer Steve Ballmer announced the acquisition of Nokia’s handset unit last month. Microsoft, which had close ties with Nokia through a 2011 partnership, is counting on the deal to boost its share of the $280 billion smartphone market and to lure makers of games, productivity tools and other apps, who view the company’s mobile software as an afterthought compared with Apple Inc. (AAPL:US)’s iOS and Google Inc. (GOOG:US)’s Android.

High Hurdles

Yet interviews with more than a dozen developers show that the odds remain stacked against Microsoft -- even with the Nokia deal, which is set to close in the first quarter of 2014. Developers said that while Nokia’s handset business gives Microsoft a ready pipeline of Windows Phone devices, it isn’t enough to overcome a lack of users, or the cost and confusion related to the technical specifications of writing for the company’s phone and tablet devices.

Ultimately, it comes down to where developers can make money -- and that’s not with Microsoft, said William Hurley, a co-founder of Chaotic Moon, a maker of apps for companies including Walt Disney Co. (DIS:US) He said the company’s most recent game, “Dragon Academy”-- which is free to download, with consumers paying for upgrades -- generated more in one hour of sales on Apple devices than was made through all of Chaotic Moon’s releases globally for Windows Phone in the past year.

“What basket would you put your eggs?” Hurley said, adding that Chaotic Moon chose not to make “Dragon Academy” for Windows Phone.

Big Lag

Microsoft, based in Redmond, Washington, currently has more than 175,000 applications for Windows Phone, compared with more than 900,000 for Apple iOS and more than 1 million for Google Android -- and even those apps that it does have typically come to its platform later than for rivals.

News-reading app Flipboard Inc., for one, debuted on Apple’s iPad in 2010 and joined Android in 2012, yet has no immediate plans to release a version for Windows Phone. Other notable apps missing include Pinterest, Instagram and Uber.

The paucity of applications has impeded gains in Microsoft’s smartphone market share. The company had 3.7 percent of the global smartphone market in the second quarter, compared with 79 percent for Android and 13 percent for Apple, according to IDC.

Microsoft executives said they are well aware of the shortcomings and said that adding Nokia will help. Joe Belfiore, vice president and manager for Windows Phone, said owning Nokia will speed creation of handsets with its software and result in a more cohesive marketing strategy.

He said that the takeover will also let Microsoft utilize Nokia’s sales team to educate more people about Windows Phone, especially the staff at retail outlets where people buy their devices.

Changing Perceptions

“If you’re not paying attention as a retail sales person, a customer walks into your store and asks about phones, you’re going to make your assumption about where Windows Phone is at based on the last time you paid close attention,” Belfiore said.

Microsoft also continues to lighten the cost of building apps for Windows Phone by paying for development and marketing. An example is Pandora Media Inc. (P:US)’s music-streaming service, which debuted this year. Microsoft built the application and keeps the software updated. Facebook Inc. (FB:US)’s Windows Phone app, which came out in 2010, also was made by Microsoft.

“We help them with development, whether that’s funding their own development or working with vendors,” Belfiore said. “In some cases, we’re doing development ourselves.”

Swaying Skeptics

Belfiore said Microsoft will do more promotions for developers once it owns Nokia, including having apps pre-installed on phones.

Some developers still need more convincing. Take Greg Kostello, CEO of video-editing application Givit. Last year, Kostello created an app for Microsoft’s Windows 8 operating system and Microsoft’s Surface tablet. Given Microsoft’s success in personal computers, Kostello expected Surface to be a hit.

Yet after several months and little market traction, San Diego-based Givit pulled the plug, choosing instead to focus on the iPhone and Android devices.

Now with Microsoft’s purchase of Nokia’s phones, Kostello wants to see the marketplace emerge before committing resources. “We tried it, made a bet and didn’t see it take off,” he said. “We’re a little more gun shy.”

Other Repercussions

Attitudes like Kostello’s ripple beyond Microsoft’s smartphone endeavors to the tablet market now dominated by Apple’s iPad. Microsoft wrote off $900 million of unsold Surface tablets this year after lackluster sales. Microsoft won’t disclose how much it makes from mobile devices and services.

“The lack of applications that exists for the Windows platform is a critical deterrent in customer adoption,” said David Yoffie, a professor at Harvard Business School.

Many developers still want Microsoft to succeed in adding another viable outlet for their apps outside of Apple and Google.

“It would be great to have a third horse in the race,” said John Hayase, chief product officer for music service Slacker Inc. “If we see a third major mobile platform emerge, that would compel us to change organizationally how we do things.”

Making it easier to create applications that work across Microsoft’s smartphones and tablets will help developers, said Smith of Smule. Right now, the cost of developing for both isn’t worth it, he said.

Another area where Microsoft can focus is business customers, said John Arrow, chairman of Mutual Mobile Inc., which makes apps for companies including Citigroup Inc. Since many businesses already use Microsoft technology, the company is well positioned to expand with phones in the enterprise arena, he said.

Microsoft combined with Nokia “does not alter our thinking” in the short term, he said. “In the long term, this investment represents some unique opportunities.”

To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net; Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net


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Companies Mentioned

  • MSFT
    (Microsoft Corp)
    • $42.09 USD
    • 0.41
    • 0.96%
  • NOK
    (Nokia OYJ)
    • $7.47 USD
    • -0.07
    • -0.94%
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