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There are better ways for Microsoft to make money from smartphones than to keep investing in a mobile operating system that's losing share and relevance
Since the early days of the smartphone market in the '90s, Microsoft has been a key player. But the company's goal of reaping more revenue from smartphones might be better served by hanging up on Windows Mobile, an operating system that's become an also-ran.
Over the past two years, Microsoft's (MSFT) grasp on the market for mobile-phone operating systems has been slipping because it hasn't kept pace with the rate of developments in the smartphone market, such as touchscreens and a wide variety of compelling applications. As a result, Microsoft's share of the smartphone operating system market has become anemic, while those of Apple (AAPL) and Research in Motion (RIMM) have soared.
Traditionally, Microsoft aimed Windows Mobile at corporations that wanted Windows as a standard across PCs and handhelds. But many companies have loosened those policies. Workers are now using the same smartphones for office and personal tasks—and they're not choosing Windows.
I expect Microsoft to realize this and exit the mobile operating system market within the next two years.
The company says it's still investing in the platform, however. "We are 100% committed to the Windows phones business," a Microsoft spokesman said in an e-mail. Microsoft's investments in operating systems and cloud computing will enable consumers to share information across all of the devices they use, he said.
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At a July 30 meeting with financial analysts in Redmond, Wash., Robbie Bach, president of Microsoft's entertainment and devices division, said the company is "going to invest and build on the brand of Windows phones," although he acknowledged that Windows Mobile is losing market share and that relationships with phonemakers aren't as strong as the company would like. "We had a challenging year," Bach said.
The mobile device market is important to Microsoft, in large part because it increases use of Exchange e-mail, which generates billions of dollars in annual revenue for the company. Windows Mobile, on the other hand, is a small part of Microsoft's overall business—and costly to maintain. It hasn't been given enough funding or management attention to make it a contender against Apple's iPhone, Research in Motion's BlackBerry devices, and new phones that run Google's (GOOG) Android software or Palm's (PALM) WebOS.
Part of the problem is that Microsoft hasn't updated its smartphone software with features that consumers and business users find compelling. In 2010, Microsoft plans to release Windows Mobile 7, which will deliver enhanced touchscreen capabilities and better Web browsing. Until then users will have to settle for version 6.5, a minor release due in October that isn't apt to draw hordes of new phone buyers. Microsoft's Windows Marketplace app store isn't likely to help much either. And Apple, RIM, Google, and Palm won't be sitting still in the meantime.
Microsoft is also losing the support of many of its leading device makers. Taiwanese hardware maker HTC, the largest supplier of Windows Mobile smartphones, is making a major commitment to Android. So is Motorola (MOT). Both vendors see the Google software as having a better chance of succeeding than Microsoft's operating system does.
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Palm, also a major supplier of Windows Mobile devices, has bet on rejuvenating itself by building devices that run its WebOS, designed specially for today's smartphones. And Hewlett-Packard's (HPQ) Windows-powered handhelds haven't had much impact.
Except for businesses that buy Windows Mobile devices for their workers, the smartphone market has largely passed Microsoft by. In the past, many companies designated Window Mobile as the only officially sanctioned operating system that could connect to their networks. Fewer companies now do this. Many realize they must support the platforms that users demand.
Here's the good news for Microsoft, though: It may not need Windows Mobile to generate revenue from smartphones. The company already dominates the markets for productivity, e-mail, and collaboration software with its Office and Exchange products. ActiveSync, a Microsoft technology for letting users read Exchange e-mail and collaborate on smartphones, makes Exchange Server even more compelling.
The most important part of Microsoft's mobile strategy should be based on enhancing ActiveSync to its strategic advantage by ensuring that the greatest potential number of phones work with the software.
It's unlikely that Microsoft's share of the corporate e-mail market will diminish soon, despite Google's desire to sell its own Web productivity software. Getting lots of smartphones and other mobile devices hooked up to servers that run Microsoft's business products will do far more for the company's bottom line than continuing to struggle with an antiquated and noncompetitive mobile operating system.