Microsoft: Making Mobile Progress

Sony Ericsson unveils a line of phones boasting Microsoft's Windows Mobile operating system, a coup for both players

Every year since 1999, when Microsoft (MFST) first said it would produce a mobile-device version of its Windows operating system, the company has used Europe's annual industry gathering to take swipes at Symbian, maker of the leading software platform for smartphones. This year's Mobile World Congress is no different. On Feb. 10, as some 50,000 people gathered for the opening of the show in Barcelona, Spain, Microsoft was crowing that Windows Mobile would be used in a new line of phones by Sony Ericsson, a Symbian shareholder and major producer of Symbian handsets.

In winning Sony Ericsson as a customer, Microsoft can now claim that Windows Mobile runs phones made by four out of five of the world's top handset makers. "There is a steady movement from Symbian to Microsoft," says Scott Horn, director of Microsoft's Mobile & Embedded Device Div.

To be sure, Microsoft is making progress against Symbian. About 13% of the smartphones shipped this year are expected to be Windows Mobile devices, up from a 9% market share in 2007, estimates Richard Windsor, a wireless analyst at the brokerage firm Nomura. Yet even if Symbian is losing some ground, the platform's market share is still expected to total a commanding 48% this year. More significant, it's unlikely Microsoft will ever snag Nokia (NOK), the controlling shareholder in the Symbian consortium and also the world's largest cell-phone maker with a 40% market share.

How Deep Will the Relationship Be?

Microsoft paints its announcement with Sony Ericsson on the new Xperia line as a major coup, explaining that it plans to collaborate with the handset vendor on mobile browsing, music, and other media, a move that may help both companies better straddle the line between phones for business users and sophisticated consumers, or so-called prosumers. The X1, the first Xperia phone, is a slider phone with a full QWERTY keyboard, combining Office applications and multimedia entertainment. "Microsoft is edging more towards the prosumer side, RIM (RIMM) is becoming more consumer-centric, Symbian is moving more towards the enterprise, and Apple (AAPL) is trying to gain more of an enterprise focus," says Ben Wood, director of CCS Insight, a British mobile consultancy. "So everybody is competing on everybody's turf."

Analysts question, though, just how deep Microsoft's latest partnership with a major handset vendor will go. They expect Sony Ericsson, like some of the other handset vendors Microsoft has partnered with, to limit Windows Mobile to just a few phones aimed mainly at corporate users, an area where Symbian and Nokia are not as strong as they'd like to be. But other phones made by Sony Ericsson will continue to use operating systems that compete with Microsoft's. "My take on this is that Sony Ericsson will do what other partners have done," Wood says. Indeed, at the same Feb. 10 Barcelona press conference to unveil the Microsoft phones, Sony Ericsson also announced two new midrange phones powered by the Symbian operating system.

Some of the wireless partnerships announced by Microsoft in the past haven't amounted to much. Take the case of Ericsson in 1999, before it merged its cell-phone operations with Sony's. Just months after Microsoft chief Bill Gates unveiled his company's mobile ambitions, the U.S. software giant announced a joint venture with Ericsson to build phones powered by Microsoft's Mobile Explorer and deliver e-mail to wireless devices. "Mobile Internet access and services are crucial for realizing Microsoft's vision of empowering knowledge workers and consumers through software anytime, anywhere, and on any device," Steve Ballmer, then Microsoft's president and now CEO, said at the time. And Ericsson, he said, "is an ideal partner to help deliver this vision." But no phones were ever launched and the partnership collapsed. Instead, Ericsson (ERIC) formed its partnership with Sony (SNE). And, adding to the sting, Sony Ericsson became a Symbian shareholder.

Soul-Searching in Redmond about the iPhone

Some of Microsoft's other best-laid plans for the mobile sector have also fizzled. At the 2003 mobile show, then held in Cannes, France, Microsoft announced that Samsung would be making Windows-based smartphones. But the very next day, Symbian revealed that Samsung was becoming a shareholder and would start shipping smartphones on that platform, too. LG also makes smartphones with both Symbian and Windows.

Microsoft's most successful deal to date with a top handset maker, say analysts, has been with Motorola (MOT), which sold its Symbian stake in 2003 and started mass-producing Windows-based smartphones such as the Q (though it still produces some phones based on Symbian). But Motorola's well-cataloged tailspin means that it is likely to spin off or sell off its mobile-phone unit soon (, 1/31/08). If the potential buyer is not an enthusiastic member of the Windows Mobile camp, Motorola's woes could extend to Microsoft.

Perhaps more worrying for Microsoft is that Apple succeeded in coming out of nowhere with the iPhone, says CCS Insight's Wood. "I bet there has been quite a lot of soul-searching in Redmond about 'How the hell did that happen. We put our best brains on this and they just came out and whooped us,'" he says. Still, "drip by drip, Microsoft is making headway in the smartphone market," says Neil Mawston, director of wireless device strategies at tech consultancy Strategy Analytics. "They are gradually picking up tier one partners," and Sony Ericsson is one more feather in Microsoft's cap, he says.

For Sony Ericsson, which holds about a 9% share of the global market for smartphones, it would be hard to make the investment required to get a strong foothold in the enterprise market. So focusing on the consumer side of business and adding a line of phones powered by Microsoft makes sense, say analysts.

At the same time, the move by Sony Ericsson to adopt Windows Mobile for some phones is a slap to Symbian. It also does not bode well for the future of UIQ, a software platform based on Symbian that Sony Ericsson purchased in 2006 to help it introduce applications such as real-time mobile e-mail, Internet browsing, and enhanced music applications, says CCS Insight's Wood. That said, four of the top five global handset vendors will introduce new phones powered by Symbian's operating system during the Barcelona mobile congress. In addition to Sony Ericsson, sources say LG, Samsung, and Nokia will also introduce Symbian phones. To date, some 200 million phones have been shipped with the Symbian operating system.

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