A Hard Cell for Microsoft

Redmond is determined to get its new software into 25% of mobile phones worldwide. Good luck

Steve Ballmer wants to get inside your cell phone. In December, the Microsoft (MSFT ) CEO ordered the company's wireless group to begin reporting directly to him. And in the past few weeks, he has further intensified his focus on the division, says Juha Christensen, Microsoft's vice-president for mobility.

"The strategy is really to remove the black magic that surrounds the making of the mobile phones," says Christensen. And do to the cell-phone software sector what Redmond has done so well in the PC business -- turn code into a cash cow.

The vociferous Ballmer -- who once had surgery to repair his vocal chords after damaging them by yelling at a company pep rally -- hopes that by 2005 a quarter of all cell phones will feature Microsoft software. That's an ambitious goal for a company that has zero market share now. Worse, Microsoft's reputation as a brutal competitor willing to do anything to dominate a market precedes it.


  Cell-phone network operators are wary of letting Microsoft exert too much influence over their business. Likewise, leading handset makers, such as Nokia, view Ballmer's quest as a crusade to take control of their customers. The upshot? Microsoft has an uphill battle ahead of it (see BW, 3/11/02, "Will Microsoft Overplay Its Wireless Hand?").

Skeptics point out that this cell-phone push echoes the company's attempts to be a player in cable television. Microsoft has long sold software for interactive set-top boxes. Despite sinking $10 billion into big cable companies such as AT&T Broadband in hopes of getting a leg up in that business, Microsoft remains a marginal player, says Ken Zita, a telecom consultant in New York. That lack of success is due in part to cable companies' fear that Microsoft would try to dictate prices and lure away their customers, says John McPeake, an analyst with Prudential Securities.

Microsoft could stumble again. As the world's largest cell-phone supplier, Nokia alone presents a huge barrier. The Finnish company, which sold 140 million of the 400 million mobile phones purchased worldwide in 2001, exerts considerable influence in the industry. It has also started licensing the code that runs its popular phones and announced a deal with chipmaker and lead supplier Texas Instruments to make standard hardware for other manufacturers willing to use its code.


  Industry insiders say Nokia, which didn't return requests for comments, has no intention of letting Ballmer's crew into the game. In this instance, "it's the equivalent of Hyundai taking on GM," says Ed Snyder, an analyst with JP Morgan H&Q, of Microsoft's nascent efforts to take on Nokia. The underdog role is one Microsoft is unaccustomed to playing.

And so far Gates & Co. is fighting a losing battle to get key alliances with cell-phone chipmakers and handset manufacturers. Although Microsoft announced deals last month with both Intel and Texas Instruments, they may not be significant. Intel is a relative newcomer in the cell-chip business, and among Nokia's numerous alliances is one with TI. Redmond needs the kinds of ties Nokia has to gain critical mass in the business.

Thus far, only one cell-phone maker, British-based Sendo, plans to use Microsoft software in the near future. (Microsoft bought a small chunk Sendo, which denies that it had any bearing on its decision.) Sendo designs its own hardware, according to Ron Schaeffer, head of product strategy for the company. "Typically, a design done in-house would have better integration, fewer components, and lower power consumption," he points out.


  Microsoft might be able to leverage its dominance in the corporate e-mail market to create easier access to internal messaging systems using its Web-surfing, data-friendly handset software, Smartphone. And reduced integration costs between cell phones and corporate e-mail could be a big plus for Ballmer.

Still, "I don't think it's in anyone's interests to let Microsoft dominate the handset environment," says Andrew Cole, an analyst with wireless consultancy Adventis. Whatever Microsoft comes up with "could be the most exciting thing in the world, but [the handset makers] still wouldn't want it."

The stakes are high. Breaking into this industry could play a key role in Microsoft's .NET strategy, which is centered on accessing information or executing transactions anywhere on any platform. And Microsoft claims that if Ballmer's three-year plan is successful, the company will receive 2% of its total revenue from cell-phone software. And that could be just the start if the wireless data business explodes in the next few years, as many analysts are predicting.

Clearly, Microsoft has the resources to undertake a sustained run at Nokia & Co. And Ballmer, who is a jogger, is known to accelerate whenever he's going uphill. The question is: How fast and how long he can run this time?

By Olga Kharif in Portland, Ore.

Edited by Alex Salkever

Before it's here, it's on the Bloomberg Terminal.