It was the height of the Internet boom, and in July, 1999, everyone from America Online Inc. (AOL ) Chairman Stephen M. Case to TV hostess Oprah Winfrey descended on Sun Valley, Idaho, for a high-tech retreat. Far from the spotlight, Microsoft Corp. (MSFT ) Chairman William H. Gates III button-holed one of the few Europeans there, Nokia Corp. (NOK ) Chairman Jorma Ollila. According to Gates's e-mail following the meeting, now one of the U.S. government's exhibits in the Microsoft antitrust case, the two leaders discussed the coming mobile Internet and how their companies--one the titan in software, the other in mobile phones--were preparing for it. Back then, Gates held out hope that the Finnish cell-phone giant might eventually incorporate Microsoft programs in its phones. "How come we don't merge our effort with Nokia?" he wrote to his colleagues.
This magic match-up never happened, and for a simple reason: Ollila and his colleagues saw long ago how Microsoft virtually took over the personal computer industry, helping itself to a heaping share of the profits. So the Finns were moving, even as Gates and Ollila chatted, to keep the Redmond behemoth at bay. This meant that if Microsoft was going to make its way to hundreds of millions of mobile users, it would get precious little help from Nokia. Now, even as the mobile Net lurches through a crisis of confidence and funding, a mano a mano struggle between the two giants is under way.
HIGH GROUND. In mid-June, Microsoft unveiled a contract with Britain's Vodafone Group PLC, the world's No. 1 mobile-phone operator, to offer a host of Microsoft services and products, from e-mail to Excel spreadsheets, through Vodafone's wireless network. What's more, manufacturers from Korea's Samsung to Britain's Sendo are launching Web-surfing mobile phones powered by Microsoft software. These so-called Stingers should debut in Europe later this year to battle Nokia's latest Web phone, the $800 7210 Communicator, a flip-open computer with a keypad and color screen that hit European shelves on June 19.
To date, the battle is raging only in tiny niches of the $100 billion communications industry. But strategically, it's crucial. Microsoft sees the handset orchestrating a galaxy of digital devices at home and at work--the TV, the games console, even the refrigerator--all of them powered with varieties of Windows software. If Microsoft controls the handset, it tightens its grip on all the other pieces. "This is an area where Microsoft needs to be," says Ken Dulaney, mobile computing analyst at Gartner Inc.
Nokia's need for the Net is no less dire. While the company dominates cell phones, the market for handsets is leveling off. Indeed, Nokia's June 12 announcement of a flattening market led to a 20% tumble in its stock. To reignite the market, Nokia is developing a new lineup for the mobile Net. But if a competitor grabs the software business, either in the phones or on the networks, Nokia could be left selling dumb terminals, commodity handsets that are only valued for the software they run on. And the biggest software threat--no surprise here--is Microsoft.
To lay claim to the mobile Net, each company is stretching far from its core market. Microsoft, from its wireless base in Stockholm, now wants to cram its software into phones. That means wrestling with limitations on memory, battery life, and the challenges of running the equivalent of a computer in a handset. And Nokia is pouring $3 billion in research and development, much of it into software labs in Japan, Finland, and Silicon Valley. More and more, CEO Ollila says, "we're becoming a software company." But while Nokia has proven masterful at designing software to operate phones, the new ventures lead its developers far from their old turf into portal design and systems to protect mobile banking from hackers.
DIFFERENT VISIONS. The two companies represent different visions of the wireless Net. Nokia focuses on a new Net, one with services directed toward people on the move. The Finns note that many the world's 700 million cell-phone subscribers aren't yet online. But they're already sending billions of short text messages to each other monthly. In Nokia's mobile Net, those text messages grow into pictures and video clips.
Microsoft, coming from PC-centric America, concentrates largely on mobile extensions of the Internet as we know it now. Its first target is the laptop-lugging suit rushing through the world's airports. These users not only have a PC at work but also use Microsoft's own Word, PowerPoint, and Outlook programs---and want access to all this data in a cab, a restaurant, or between innings at Yankee Stadium.
So starting in July, Vodafone will offer its corporate customers in Britain a Microsoft service to extend the company Intranet--e-mail, orders, customer lists, inventory--to the mobile handset. While an executive on the go can use a standard mobile phone for basic messaging, Microsoft hopes companies will shoot for full-powered connections that can deliver not just simple e-mail but attached files with complex data. For this, the software giant is promoting either $500 Pocket PCs, such as Compaq's iPAQ, equipped with mobile modems, or smaller Stinger phones, expected to cost $600 to $700.
Microsoft landed Vodafone by selling the service at near giveaway prices. Most of the revenue comes later as Vodafone sells the service to corporate customers and splits the take with Microsoft. Other deals are brewing with Spain's Telefonica and Germany's Deutsche Telekom. "The phone companies want to raise revenue per user without spending much money," says Juha Christensen, vice-president of marketing and sales in Microsoft's mobility group. "That suits us. We get a stream of sales every month."
Phonemakers, of course, pooh-pooh Microsoft's gains. "They're targeting a small niche of the market," says Colly Myers, CEO of Symbian Ltd., a software joint venture founded three years ago by Nokia, Motorola (MOT ), and Ericsson (ERICY ). The business users number only in the tens of millions. Nokia, which won the cell-phone wars in the last decade by turning an expensive grey business tool into a cheap and colorful consumer product, is targeting an audience that may top 1 billion. "When you go to the guy on the corner," says Niklas Savander, vice-president for Internet applications at Nokia Networks, "affordability and coolness are way bigger factors than whether it runs PowerPoint."
True. And as this battle takes off, Nokia is certainly in the lead. It sells mobile networks and phones by the hundreds of millions, while Microsoft is just getting started. But in the last year, the Redmond giant has mastered handheld computers, and now it's focusing on phones. Nokia had what it took to whip fellow phonemakers Motorola and Ericsson in the '90s. Now, the Finns are grappling with a different animal altogether.
By Stephen Baker in Paris