Microsoft’s failing Windows Phone strategy proves that sometimes, the best platform is the one you can make money from, even if it isn’t yours. Here’s why hopping into bed with a competitor might have been Microsoft’s best move for mobile.
Microsoft is all about profit right? Just like any other successful tech company, Microsoft executives are always looking for new ways to rake in the cash and they’re good at it too. From software to hardware, for businesses and consumers, Microsoft has expanded to cover a lot of bases. When it comes to the mobile market, that success has proven more elusive, until now. Before you spray your coffee across the monitor (or touchscreen) in disbelief, I should make it clear that I’m not talking about Windows Phone, I’m talking about Android.
Back in September of 2011 Goldman Sachs analysts caused a furor when they suggested that Microsoft could earn $444 million between June 2011 and June 2012 from Android licensing agreements, as reported by Business Insider. At the time, Microsoft had settled with a few companies using Android, most notably Samsung and HTC. Since then, it has secured deals with many others including LG and most recently Pegatron, a Taiwanese manufacturer that supplies parts to Apple, Asus and HP. The vast majority of Android devices being sold in the U.S. now turn a profit for Microsoft.
The exact details of the licensing agreements are never revealed, but looking at Barnes Noble complaints during its legal battle with Microsoft, the fees demanded for Android licensing may have been increasing. That Goldman estimate was based on licensing fees of between $3 to $6 per device, but the actual fees agreed in some cases could be much higher. Barnes Noble claims Microsoft demanded “shockingly high” fees. As more and more licensing agreements have been reached and the courts have found no wrong doing, Microsoft’s bargaining position has strengthened significantly.
What about Windows Phone? It’s no secret that Microsoft’s mobile platform hasn’t set the world on fire. Despite predictions about it taking off this year, it really hasn’t. A recent report from Gartner shows a 56.1 percent market share of smartphone sales for Android compared to 1.9 percent for Microsoft. That actually represents a decline for Microsoft from 2.6 percent last year. We can probably attribute a lot of that to the death of Windows Mobile, but there’s no hiding the fact that Windows Phone is way behind the competition and doesn’t look like it’s catching up.
Now consider that the Windows Phone partnership with Nokia will also cost the company billions of dollars, according to Nokia. In fact, Nokia’s fourth quarter 2011 financials showed a payment of $250 million for “platform support” and it’s doubtful that Nokia pay anywhere near as much as other licensees. A whopping $27 is the average figure that ZTE pays per Windows Phone device it produces, according to their UK Portfolio Manager Santiago Sierra.
It’s hard to believe that Microsoft earns anywhere near as much from Windows Phone as it does from Android. In fact, it looks as though Microsoft earns more from the Android OS than Google does. If profit is the bottom line then Microsoft should be backing Android, right?
In reality, Microsoft CEO Steve Ballmer has repeatedly criticized Google’s mobile platform. He claims that Windows Phone will prevail because it is easier to use, but consumers clearly don’t agree. It now looks as though Ballmer is betting the future of Microsoft on Windows 8. The Windows 8 platform will offer a consistent experience across devices, from your PC to your tablet to your smartphone. Is that really what people want? A touchscreen user interface foisted on their desktops in the name of consistency? Only time will tell.
Having already poured so much into Windows Phone, you can understand why Microsoft can’t pull out now, but ploughing on with a losing proposition simply because you have over invested is the downfall of many gamblers. The idea that Windows 8 will be a great success seems like wishful thinking. Windows 8 seems to be primarily targeting tablets, to the detriment of desktop computers. That puts Microsoft into the ring with Apple, whose iPad overwhelmingly dominates the tablet market. It won’t be easy to muscle in, and manufacturers already struggling to make a mark with Android tablets will need good incentives to dabble in Windows 8.
It seems to me that Microsoft has spent an awful lot of money already trying to make Windows Phone into a credible competitor for Android and iOS, and the whole exercise has been a miserable failure. Was Windows Phone simply too late to the market? Did it fail to inspire manufacturers because of strict restrictions on device specs and high licensing fees? Did it fail to inspire app and game developers because of a tiny user base? Yes, yes and yes. The reasons don’t even matter anymore, because the cold, hard truth for Microsoft is that Windows Phone continues to be outsold by Android and iOS.
I guess the only silver lining is that the Android licensing deals can pay for Microsoft’s efforts to promote Windows Phone. It seems somehow perverse to fund your platform by profiting from your competitor’s platform, and it seems churlish to keep criticising them while you do it. Does it even make business sense? I don’t think it does.
If Microsoft had cut its losses and backed Android instead of doing the Nokia deal, the company would be in a much stronger position now. By focussing on Android licensing deals, developing apps and games for the platform and maybe even launching a rival store for Google Play, Microsoft could have secured a big piece of a giant cake, instead of a whole tiny cake. Amazon’s foray into the Android ecosystem shows that Google’s hold on the platform is far from absolute. Maybe Microsoft could have usurped it and integrated its own services. Why not take the patent trolling one step further and just claim the platform as its own?
Microsoft’s attitude toward Android has more to do with its war on Google. It’s a war of attrition on multiple fronts, and it doesn’t serve either company well.