Death of a Dream

Tiny Sendo linked up with Microsoft to build a smart phone. What the relationship produced were recriminations and a bitter lawsuit

Back in 1999, Hugh Brogan had a dream. The CEO and co-founder of Britain's only mobile-phone maker foresaw a day when wireless handsets would be as powerful as portable computers. And just as Dell Computer churns out built-to-order PCs from standard parts, Brogan figured he could manufacture cookie-cutter Web-enabled "smart phones" that would be customized at the last possible minute to fit the whims of mobile carriers. Heck, they might even run Windows. With such astandardized protocol, the whole wireless business could inherit the efficiency of the PC industry. Brogan was sure he had the formula. And in a great stroke of luck, he found a backer in Microsoft.

Now, Brogan's dream lies shattered. On Nov. 7, 2002, the 38-year-old entrepreneur called the staff of his young startup, Sendo Holdings, to a 9:30 a.m. "town meeting" at the new company headquarters on the outskirts of Birmingham. Most employees figured he was planning a speech on Sendo's next moves. After all, the 325-person company, which makes a broad line of mobile handsets, finally was ready to ship its highly anticipated Z100 Smartphone -- with built-in Microsoft software -- after two years of hard slogging.

SEE YOU IN COURT.

  Instead, Brogan dropped a bomb. He and the board had decided to end Sendo's relationship with Microsoft. The Z100 -- the result of hundreds of man-years of effort -- was canceled, costing Sendo as much as $300 million in lost revenue. The company would develop a new smart phone using rival software from mobile colossus Nokia and Britain's Symbian. "We have to do this to save the company," he told employees. Brogan's explanation: Microsoft had double-crossed Sendo.

Six weeks later, on Dec. 20, Sendo filed a lawsuit against Microsoft in U.S. Federal District Court in Texarkana, Tex., near Sendo's U.S. office. The suit charges the software maker with fraud, theft of intellectual property, and conspiracy to destroy the startup. Privately held Sendo is seeking unspecified monetary damages. Microsoft is scheduled to file its answer to Sendo's complaint on Feb. 3.

It seems incredible: Why would Microsoft stoop to something so callous and risky? Brogan's answer: Under the terms of their contract, the software giant stood to obtain royalty-free access to Sendo's technology in the event the startup went bust. Such clauses are common, but Sendo's suit alleges Microsoft had a "plan" to gain its trust, "plunder" Sendo's echnology, and drive the company "to the brink of bankruptcy." Microsoft's curt reply: It respects intellectual property of both partners and rivals and "looks forward to refuting Sendo's baseless claims."

TOWERING CHALLENGE.

  It's up to the court to decide whether Sendo's case has merit. Microsoft has plenty of critics who say the giant plays rough. But the real story of Sendo's fall could just as easily be a tale of inexperienced entrepreneurs who ran out of money before they worked the kinks out of their technology -- and are now turning on a rich patron to salvage what they can. Microsoft is expected to counter that Sendo brought on its troubles through incompetence and financial mismanagement. In November, before Sendo filed its suit, Microsoft's vice-president for mobile devices, Juha Christensen, told BusinessWeek: "The closer you get to the truth, the better the story looks for us."

Whatever the outcome, the falling out is a sign of the enormous challenges that companies encounter developing wireless Web phones. Squeezing radios, microprocessors, and software into lightweight handsets and then getting the phones approved by picky operators has proved daunting: "Everybody has found it difficult to do," says Ben Wood, senior analyst for researcher Gartner in London. The squabble with Sendo is also another setback in Microsoft's quest to break into mobile. "This is a bloody nose," says telecom analyst John Jackson of Yankee Group in Boston. How did Sendo go from Microsoft flag-bearer to bitter enemy? Microsoft won't discuss details, but Sendo's court filing and conversations with company insiders paint a picture of growing mistrust, technical travails, and financial crisis.

RAVE REVIEWS.

  After a year of courtship, Sendo and Microsoft in the fall of 2000 contracted to collaborate on a phone due out in August, 2001 -- one that would be the first to use the mobile version of Windows, then known by the code name Stinger. Microsoft invested $12 million in Sendo for a 5% stake and a board seat. Microsoft was attracted by Sendo's technical acumen and experience. The software maker also was thrilled to land a partner after the rest of the mobile Establishment turned its back on what it perceived as a PC-industry interloper. And Sendo produced a dazzling prototype that won rave reviews at the mobile industry's annual shindig in Cannes.

Behind the scenes, though, things were rocky. In its suit, Sendo says Microsoft repeatedly said Stinger was nearly ready. But, says Sendo, Microsoft could never manage to deliver working code to its partner. As the Z100's commercial launch date kept slipping, Sendo's cash position got desperate. Eventually, Microsoft offered Sendo a $14 million loan. Facing bankruptcy, Brogan accepted the loan, even though it had a provision allowing Microsoft to demand immediate repayment if Sendo failed to ship phones by April, 2002.

Yet Sendo missed the April deadline -- again, it says, because Microsoft hadn't finished the software, by then known as Smartphone 2002. Microsoft agreed not to call the loan, but in May demanded a four-day technical audit of Sendo's progress. Sendo finally got working code from Microsoft on Sept. 27, and the Z100's launch was set for early November.

FRENCH TWIST.

  Brogan had always known that Sendo's relationship wasn't exclusive. But on Oct. 22 -- two weeks before the Z100's scheduled release -- Europe's second-largest mobile carrier, France Telecom-owned Orange, unveiled a private-label Microsoft Smartphone, called the SPV, built by High Tech Computer of Taiwan. Analysts were amazed that this mobile-phone neophyte delivered a Smartphone before Sendo. Now Sendo's suit says Microsoft provided HTC with test versions of the Z100 to aid in the development of HTC's phone. A damning charge -- but legal experts say that Sendo must provide strong proof that Microsoft or HTC didn't invent their own solutions. HTC and Orange declined to comment.

Brogan still faces an uphill battle to beat Microsoft. His quest has attracted quiet support from other companies that feel burned by their dealings with the software giant. For this Brit, who still believes in the vision of a multimedia wireless Web, nothing could be sweeter than to see Microsoft put in its place.

By Andy Reinhardt in Birmingham, England, with Jay Greene in Seattle