Commentary: Will Microsoft Overplay Its Wireless Hand?

By Andy Reinhardt

If there is one technology in which Europeans can claim superiority, it's mobile phones. Through a mix of uniform standards and technical prowess, operators like Vodafone Group PLC (VOD ) and suppliers like Nokia Corp. (NOK ) dominate the wireless scene. But the Americans figure it's the moment to seize the advantage. That's because mobile phones are becoming more like computers, and wireless systems are merging with the Internet--areas where the U.S. excels.

Among the gate crashers, none is causing more consternation than Microsoft Corp. (MSFT ) The software giant made a huge splash at a mobile-phone convention in Cannes in mid-February. In meetings aboard its private yacht, it talked up an alliance with chipmaker Intel Corp. (INTC ) to define the next wave of high-end, Web-enabled mobile devices. It was a clear challenge to the handset makers, especially industry leader Nokia, which aims to maintain its influence over the wireless Net. Microsoft contends phones using its software will be more powerful, flexible, and user-friendly than any other system. "The mobile world is moving from voice to data, and data is what we understand best," says Ben Waldman, Microsoft's vice-president for mobile devices.

The giant from Redmond, Wash., is a force to be reckoned with. But this bid by Bill Gates to replicate his PC success faces daunting odds. True, Microsoft has scored a hit in the fast-changing videogame business with its Xbox console and has clawed its way up to a 21% share of the still-nascent handheld computer market. But it has had a lot less luck breaking into established businesses like office equipment and cable television. One common critique: Its software tends to be unwieldy and incompatible with prevailing standards.

The biggest obstacle to Microsoft's wider aspirations is the mistrust it engenders among potential customers. Mobile-phone makers are no exception. They have watched the software giant gobble up most of the profits in PCs and fear the same result in handsets. Says one telecom exec: "Everybody hates Microsoft."

Such hatred is not stopping the famously persistent company. Microsoft argues that it's better positioned than its rivals to offer an open platform on which third parties can create their sexy new wireless applications. "We're democratizing handsets," says Waldman.

Yet smart spin can't make up for the fact that Microsoft is the Johnny-come-lately of wireless. The company is racing to make up for lost time with appealing new products, including stripped-down versions of Windows designed specifically for cell phones and handhelds. These operating systems, called Smartphone 2002 and Pocket PC 2002, are chock-full of goodies such as Web browsing and support for digital music and photos. But software glitches have delayed the introduction of the first handset to use Smartphone software for more than a year. The snazzy color-screen phone, from British startup Sendo, likely won't ship until the middle of 2002, and a price tag of $500-plus could well limit sales. So far, none of the European majors has announced plans to use Smartphone 2002. One reason: Even pared-down models need eight times as much memory and processing power as today's handsets.

An even larger stumbling block may be Microsoft's own oversized ambitions. Even if the company achieves its goal of getting inside 25% of the world's handsets within three years, annual revenue from selling its software might amount to only 2% of overall sales. The serious bucks have to come from sales to phone companies of Microsoft's big-ticket software and services for running wireless data systems. The handset business "is only a beachhead," says Tim Daubenspeck, an analyst at SG Cowen & Co. in London.

Mobile carriers Vodafone, Telefónica Móviles, T-Mobil, Orange, and mm02 have announced deals with Microsoft, though the extent of the relationships isn't known. But many are wary of casting their lot with the behemoth. The fear is that Microsoft could start siphoning away some of their revenues by offering its own wireless services such as portals, messaging, and online content. If Microsoft pulled mobile users over to its MSN instant-messaging service, wireless operators could see billions of dollars a year in text-messaging business slip away.

Nokia, of course, is also competing with its customers by luring consumers to its Club Nokia wireless portal. But the Finnish company has a lot more experience delivering the equipment and services that carriers want and need. And that's the problem for Microsoft. Its potential customers have a viable alternative to the Gates vision. Unless Microsoft learns to play by the industry rules, it could leave the party empty-handed.

Reinhardt covers European technology from Paris.

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