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JUNE 30, 2003
Microsoft's Second Assault on Smartphones After a lackluster first effort to build a super-cell-phone operating system, it's back with more a flexible platform and new name Bill Gates describes Microsoft as "the most optimistic company in the technology business." Instead of obsessing about the slowdown in its core market for PC software, the Redmond giant is refocusing on new opportunities, such as the market for advanced cell-phone software. That still-small market is growing at 20% to 40% per quarter, and Microsoft (MSFT ) hopes to stake its claim. About 18 months ago, it announced that by 2005, 2% of its revenues would come from cell-phone-related sales and that 25% of souped-up cell phones would carry its software platform. The latter goal was particularly ambitious, given that Microsoft had exactly 0% of the market at the time of the announcement. WINDOWS LOOK. Analysts view Microsoft's optimism as wishful thinking -- and, so far, they've been proven right. The software's first versions crawled with programming bugs, earning Microsoft heavy criticism. Its partner, British cell-phone maker Sendo, defected last fall and sued the software giant for allegedly stealing its ideas (a claim Microsoft denies). Meanwhile, Gates & Co. has grabbed less than 1% of the market in "smartphones," which are a cross between a cell phone and a personal digital assistant (PDA). In 2002, Microsoft booked a measly $20 million in revenue from the effort, says Brendan Barnicle, an analyst with Pacific Crest Securities. The market for smartphones is expected to reach 36 million units this year, says Michael King, an analyst with research consultancy Gartner. And while most of Wall Street has decreed that Microsoft would be lucky to achieve even a fifth of its original market-share goal -- about 5% by 2005 -- some analysts say Microsoft might do much better. A slew of service providers have just signed up to introduce Windows-based smartphones, which offer the traditional Windows look as well as access to Microsoft applications. The software giant has lined up top-tier handset maker Samsung, and the products will be introduced in the U.S. by either Sprint PCS (PCS ) or Verizon Wireless. And rumor has it that another major cell-phone maker -- possibly No. 2 Motorola (MOT ) -- might start producing Windows-based phones. (Motorola declined to comment.) Another possible partner, says King, is Sony Ericsson, which has been rapidly losing market share in this brutally competitive market. MORE OPTIONS. Despite its early stumbles, Microsoft is ramping up its efforts. On June 23, it announced a new brand, Windows Mobile, for smartphones and pocket PC PDA platforms. Such aggressive moves are necessary as Microsoft will face formidable competition in this emerging market from the likes of Nokia (NOK ), which is one of several major cell-phone makers supporting a rival operating system, Symbian, which is starting to gain traction in Europe. Another tough foe is Palm (PALM ), which offers its own operating system (OS) used in products from Samsung, Kyocera (KYO ), and especially Handspring (HAND ). A big unknown is whether customers will prefer products with dialpads (phones) or mini-keyboards (PDAs). Windows Mobile is Microsoft's attempt to leverage its success in the PDA market, where its market share has jumped to 30% in just a few years, says Matt Rosoff, lead analyst with consultancy Directions on Microsoft. As PDAs sprout voice capabilities and smartphones become smarter (today's handsets already boast 20 times the power of original PCs), Microsoft wants to capitalize on this convergence and offer business travelers -- key users -- more options. In the smartphone and voice-capable Pocket PC PDA market, Microsoft held a 7% share in the first quarter, up from zero a year ago, estimates Neil Strother, an analyst with Cahners In-Stat. He expects that share to creep up to 9% by yearend.
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