Death of a Dream at Sendo

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 made much the same way. Just as Dell Computer Corp. churns out built-to-order PCs from standard parts, Brogan figured he could manufacture millions of cookie-cutter Web-enabled "smart phones" that would be customized at the last possible minute to fit the whims of mobile carriers and consumers. Heck, they might even run Windows. With such standardized hardware and software, the whole wireless business could inherit the efficiency and dynamism of the PC industry. Brogan was sure he had the formula. And in his greatest stroke of luck, he found a deep-pocketed backer in software maker Microsoft Corp.

Now, Brogan's dream lies shattered in a heap of disappointment and recrimination. On Nov. 7, 2002, the 38-year-old entrepreneur called the staff of his young startup, Sendo Holdings PLC, 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.

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 and tens of millions of research and development dollars--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 Corp. and Britain's Symbian Ltd. "We have to do this to save the company," he told employees. Brogan's explanation: Microsoft had double-crossed Sendo. Only by breaking the contract and quickly lining up other business could the company survive.

Later that day, Brogan could tell only part of the story to the public because he was still in negotiations with Microsoft. He said that Sendo made the switch because Nokia's software was more flexible and better suited to Sendo's strategy of selling "mass-customized" phones to mobile carriers. But six weeks later, the real reason popped out. On Dec. 20, Sendo filed a lawsuit against Microsoft in U.S. Federal District Court in Texarkana, Tex., near Sendo's U.S. office, charging the software maker with fraud, theft of intellectual property, and conspiracy to destroy the startup. The privately held company is seeking unspecified monetary damages. Microsoft is scheduled to file its answer to Sendo's complaint on Feb. 3.

It seems incredible: Why might 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 aren't uncommon when big companies invest in startups. But Sendo's suit alleges Microsoft had a "plan" to gain its trust, "plunder" Sendo's technology, 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."

Ultimately, it's up to the court to decide whether Sendo's case has any merit. Microsoft has plenty of critics who say the giant plays rough with partners. But the real story of Sendo's fall could just as easily turn out to 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 their rich patron to salvage what they can. Indeed, analysts expect Microsoft 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 another 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 even for Nokia and Sony Ericsson. "Everybody has found it difficult to do," says Ben Wood, senior analyst for researcher Gartner Inc. 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. Even if Sendo loses in court, Microsoft's reputation may be tarnished among the phone makers it has courted.

Everything seemed so different 18 months ago. Then, analysts impressed by Microsoft's aggressive push into cell phones thought trouble loomed for Nokia. But in November, 2001, Nokia made a bold decision to license its own handset software, and now the Finnish company looks to have regained the upper hand. Many of the world's top makers, including Samsung Group, Sony Ericsson, and Siemens, have signed on to use Nokia's offering in conjunction with an operating system from Symbian that was built from the ground up for mobile uses. By contrast, Windows had to be put on a severe diet to fit in mobile phones--and Microsoft is still struggling to land customers. Its wins so far, other than Sendo, include Samsung and several Taiwanese newcomers.

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. The partnership certainly started on a happier note. In October, 1999, Brogan met Matt Taylor, a Microsoft development manager, at a telecom conference in Geneva. Sendo's strategy then and now was to design simple, inexpensive phones that could be easily modified to meet the needs of different operators. "Whatever the customer wants, we'll give it to them," Brogan says. But as a tiny newcomer, it was tough for Sendo even to get in carriers' doors. That's why the startup jumped at the chance to hitch its star to Microsoft.

For its part, Microsoft was attracted by Sendo's technical acumen and experience. Brogan and the other two founders were veterans of Philips Electronics and Motorola. The software maker also was thrilled to have landed a partner after the rest of the mobile Establishment turned its back on what it perceived as a PC-industry interloper.

After a year of courtship, Sendo and Microsoft contracted to collaborate on a phone due out in August, 2001, that would be the first to use the mobile version of Windows, then known by the code name Stinger. The gizmo was slated to run a wide selection of programs and games and to connect seamlessly with Microsoft desktop tools such as Word, Excel, and Outlook. As part of the deal, Microsoft invested $12 million in Sendo for a 5% stake in the company and a board seat.

The partnership and a prototype of the new phone were unveiled in February, 2001, at the mobile industry's annual shindig in Cannes. Reaction was delirious: Tiny Sendo rocketed to global renown. With its color screen, snazzy Windows-like software, and promise of tight links to PCs, the Z100 augured a new era for mobile communications.

Behind the scenes, though, things were off to a rocky start. In its lawsuit, Sendo says Microsoft had promised Stinger was nearly ready when they signed the contract in October 2000. But by May, 2001, the phonemaker says it still hadn't received a working code. Worse, Sendo says, Microsoft dragged its feet making promised payments, which put the British company into financial straits. The two agreed to postpone the Z100 launch until December, but even then, Stinger wasn't working, Sendo says.

Sendo's biggest surprise was Microsoft's seeming lack of cooperation. In its suit, the company says it understood Microsoft would make modifications to Stinger requested by prospective customers, such as Spain's Telefonica Moviles and Germany's T-Mobile International. Without such tweaks--which run the gamut from support for unique network setups to building special software programs into each phone--the operators said they wouldn't buy Z100s, Sendo alleges. Because it didn't have access to Microsoft's original software, or "source code," Sendo couldn't make the changes itself. Instead, it spent months devising homegrown "workarounds" to fix quirks or performance problems in Stinger.

Having spent money to stock up on parts in anticipation of the postponed December launch, Sendo found itself desperate for cash. When it tried to raise more equity, venture capitalists wouldn't cough up money unless Sendo guaranteed a delivery date. Instead, Microsoft offered the company a $14 million loan. Facing bankruptcy, Brogan accepted the money, even though it contained a provision allowing Microsoft to demand immediate repayment if Sendo failed to ship phones by April, 2002.

From there, the spiral accelerated. Sendo missed the 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 mysterious four-day technical audit of Sendo's progress. As summer wore on, Sendo says, Microsoft seemed to disengage from the partnership, but the British company continued working toward a mid-autumn ship date. It finally got working code from Microsoft on Sept. 27. By the time the phone was finished, Sendo reckons, much of its software, including support for multimedia messaging, Java, and other features, had been written or procured by Sendo.

Brogan's biggest shock was still to come. He 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 Corp. of Taiwan. Analysts were amazed that a little-known mobile-phone neophyte had delivered a Smartphone before Microsoft's marquee partner.

Brogan was apoplectic. He immediately suspected that HTC had succeeded only because Microsoft gave it technology--specifically, features and fixes devised by Sendo. The suit alleges Microsoft may have stolen these technologies during the technical audit and previous meetings. 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.

A week after the Orange announcement, Brogan terminated the Microsoft deal. His sales execs had to break the news to carriers awaiting delivery of Z100s. Fortunately, Brogan says, none has since severed its ties with Sendo: Indeed, customers are on track to snap up $250 million of Sendo's non-Smartphones this year. Brogan also says no Sendo engineers have resigned.

Brogan still faces an uphill battle to beat Microsoft. His quixotic quest has already attracted quiet support from other companies that also feel burned by their dealings with the software giant. For this ambitious 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

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