Why is Microsoft in the smartphone OS business?

Yesterday and today the "factoid" that Microsoft makes more money from patent licensing fees driven by Android than from its own Windows Phone 7 has been doing the rounds again. At this point this seems a plausible statement, but it raises a bigger question: why is Microsoft in the mobile OS business?

Its license fees for WP7 will never amount to a very substantial sum even if the platform finally takes off. Revenue from application sales is also likely to be small. The big money in smartphones is in devices, but Microsoft as yet doesn't participate in that part of the market.

So why are they in this space? A sense that they need to be to remain a viable player in the consumer software business? A desire to tap into mobile advertising revenues? Something else?

Topics

Information Technology

Android

Microsoft

Mobile

Smartphone

Windows Phone 7

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Jan Dawson

asked on July 6, 2011

Jan Dawson

Chief Telecoms Analyst, Ovum

Posted on July 8, 2011

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Brielle Nikaido

Thanks Dan. Typically only $10-15 of a smartphone's price (which might be $400-600) will go to the OS vendor, so of the $99bn number you quoted probably $2.5bn went to OS vendors (though of course that's dominated by Apple, which gains the full revenue, and Android, which doesn't charge a license fee).

I do worry though that this will end up being more akin to Microsoft's online activities, which continue to generate a little revenue and a lot of red ink, rather than Xbox. For me, Apple's motivation (and that of other device vendors) is obvious - there are tens of billions to be made in hardware revenue. Google's is also obvious - carving out a major slice of the mobile advertising opportunity. But Microsoft's is less so - and I'm not sure that just generating a billion or two a year in licensing fees is enough to justify it over the long haul. Which makes me wonder whether they ought to buy a(nother) hardware vendor, e.g. Nokia. That's where the real revenue is.

Dan Snyder

Director of Technical Operations

Posted on July 6, 2011

The revenues in smartphones are quite high - the top 3 smartphone manufacturers in 2010 brought in $99 billion:

http://mobile-device.biz/content/item.php?item=29596

How much of that $99 billion is in device sales, and how much is in OS sales to device manufacturers ? I don't know. But if I assume just 5% of that number is actual OS software sales, then that is a $4.95 billion annual market that is growing quickly.

How could Microsoft NOT play in this market ?

Also, it seems that smartphones will mostly displace desktop computers somewhere between now and 10 years from now, so how would Microsoft ever let their desktop OS dominance (and revenues) disappear due to changing market conditions and device preferences ?

Microsoft throws of $1.5 billion a month in cash, and has proven in the past that they're patient enough to keep working on their product offerings over years to win in multibillion dollar markets. I think the Xbox is a good example -- it leads the category now, but certainly didn't for the first few years of its introduction.

Blake Dong

Co-Founder and CEO, InnerTribe

Posted on July 8, 2011

Smartphone + Tablet shipments have officially surpassed PC. As the biggest software maker on the planet, Microsoft have no choice to be in this business, or they will be irrelevant in the next 10 years. (They already are judging from the stock price).

Microsoft had the Windows Mobile OS long before anyone, and they have been in the smartphone business before iPhone was conceived. Unfortunately, poor execution and lack of focus means they just plain gave this space up to Apple and Google, pretty sad...

Jan Dawson Replied on July 8, 2011

Thanks Blake. The issue is that Microsoft makes maybe $10-15 per license in mobile, compared with multiple hundreds of dollars per Windows license in the PC space, so it would have to sell ten times as many licenses to make as much money in smartphones / tablets (though perhaps this is why they are the only company trying to extend a PC OS into tablets rather than a smartphone OS).

It still feels like they just don't have the right business model for smartphones yet, to make it any sort of significant part of their future business.

Blake Dong Replied on July 8, 2011

MS has always been a platform provider, so their core competency and chief barrier to entry has always been the entire developer and application eco-system. Once you own the platform, the monopoly allows them to have an unfair competitive advantage the key application space such as Office. I think you have to look at the lifetime value of a MS customer, it's never just Windows, it's Windows + Office + whatever that ships with the device. So I think we have to look at how much the licensing will really be once you reach monopoly status, I believe the licensing is currently artificially low since we're still in the land-grab phase.

Similarly, the Smartphone OS also powers the tablets, and in 5-10 years it's all going to converge. The traditional PC form factor will be replaced by multi-touch devices that are all interconnected. So you need to be able to swipe and send your document from your phone to your tablet (which also serves as your laptop once you connect the keyboard dock). This level of integration requires that the devices all seamlessly talk to each other. You need to own the protocol and the standard. You also need to own the user experience, and to get to the best experience you absolute need to own the OS UI.

Finally, beyond pure financials and business strategy, Microsoft is still an engineering company. Or to put it another way, it needs to be an engineering company if it ever wants to return to its glory days. And the best way to retain the best engineers is if you are in it to win it, and you can't do that when you give up the biggest growth space of this decade. Given Microsoft's size, where are you going to find $100 billion markets to go play in? If Microsoft surrenders in this space, then it's game over, who would want to work for them?

In the long term strategy, MS absolutely needs to be a player in the space.