Can Microsoft Catch Up in Mobile?

Going well beyond its current Windows Mobile software, Microsoft will try to extend its desktop dominance with a "Windows phone." Is it too late?

By Peter Burrows

Microsoft (MSFT) executives have long spun visions of a world where computer users can seamlessly share information between a PC, the Web, and a cell phone. But the company has made little progress in making that vision a reality—at least until now.

On Feb. 16, Microsoft CEO Steve Ballmer will take the stage at the Mobile World Congress in Barcelona to announce a major overhaul of the company's mobile strategy. Some of the new initiatives are purely catch-up. Ballmer will unveil an online app store that lets users of Microsoft-powered phones download tools, games, and other apps. (Apple opened its own app store in July, and Research In Motion (RIMM), Nokia (NOK), and others have announced plans for their own app stores.) Ballmer will also announce a new service called My Phone that lets mobile-phone users automatically sync photos, contacts, videos, and other files to a personalized Web site and then gain access to that content from a PC or any Web-connected device.

But over the next year and a half, the company also hopes to create what it hopes will become a major new category of consumer device—the "Windows phone." Until now, the company has been content to be a supplier of an operating system, called Windows Mobile, to phone makers such as Samsung and Sony-Ericsson, which in turn branded and sold the devices as they saw fit. The hope is to convince PC owners that a Windows phone is the most sensible choice to go with their Windows computers. "We're going to double-down on the Windows brand," says Todd Peters, head of marketing for Microsoft's mobile communications business. He says to expect a major advertising push. "When people go shopping in the future, we want them to ask specifically for a Windows phone."

That would certainly be a change. Although it was a pioneer of the so-called "smartphone," Microsoft's Windows Mobile software has little of the brand cachet of the Apple (AAPL) iPhone, RIM's BlackBerry or even Palm Inc.'s products. "We haven't done a good job of positioning [our mobile products], period," says Robbie Bach, president of the Entertainment & Devices Div., which includes the mobile effort. "Most people who see a cool Windows Mobile phone don't even know it's a Windows Mobile phone. We have to communicate very clearly the value in that."

Extending the Windows Franchise

If successful, the Windows phone idea could extend the lock that's helped Microsoft become one of the great cash-generating machines in business history. Consider the reach of Microsoft's franchise. Windows runs on an estimated 1.1 billion PCs in use around the world. Roughly 500 million people use Microsoft's e-mail or instant messaging services. And while Microsoft's share of the smartphone business has fallen from to 36% from 45% in the past two years, according to Nielsen Mobile, more than 20 million phones have been sold in the past year that are based on its Windows Mobile software. But even Microsoft executives concede that the company has to succeed quickly. "What happens in the next three to four years will determine what happens for the next decade or more," says Microsoft Senior Vice-President Andy Lees, who was hired by Bach a year ago to run the mobile communications business.