Microsoft's Wireless Watershed

With a half-million smartphones on order by the Census Bureau, Microsoft's John Starkweather thinks the mobile division has turned a major corner

Microsoft's mobile division has landed a big coup. The software giant said on Apr. 4 that the U.S. Census Bureau will order 500,000 devices powered by Microsoft's Windows Mobile 5.0 operating system. The bureau will purchase these smartphones, which are able to run complex applications) between 2007 and 2009 from Taiwanese manufacturer HTC Corporation, which has also built Treos and iPaqs.

John Starkweather, group product manager for Microsoft's (MSFT) mobile and embedded devices division, says it's the biggest contract of its kind for Microsoft and possibly the industry, where purchases of even 50,000 phones are uncommon.

The order, first reported by Bloomberg News, could mark the beginning of a growth spurt for smartphones. Shipments of the handsets are expected to double this year, making up 15% of all cell phones shipped, according to consultancy ABI Research. Starkweather says it's a "watershed moment," a sign government and corporate customers -- which until now have purchased high-end handhelds in smaller numbers -- may finally be ready to deploy smartphones en masse.

Smartphone watershed or no, this may be Microsoft Mobile's moment. In September, Palm said its popular Treo handheld will use Windows (see BW Online, 9/20/05, "Palm Taps Microsoft"). Motorola (MOT) is expected to unveil its much-anticipated Q phone, featuring Windows Mobile. In all, the moves suggest Microsoft is gaining ground on Research In Motion (RIMM), maker of the BlackBerry wireless paging service. A RIM spokesman says the Canadian company didn't bid on the Census Bureau contract "because it falls outside the market RIM serves."

On April 4, Starkweather spoke with BusinessWeek Online reporter Olga Kharif about the Census Bureau win and Microsoft's mobile strategy. Edited excerpts follow:

What is the significance of this deal for Microsoft and the industry?

It's a watershed moment for Microsoft and the industry at large. Up till now, most wireless device deployments by companies fell between 50 and 500 in terms of volume of devices. Purchases between 500 and 5,000 would be considered pretty substantial wins. And 5,000 is a very big win. A 50,000 unit win is huge; we've done a few in the past, with the likes of FedEx. A 500,000 win is just unheard of. This is the largest-ever win for Microsoft. And we believe this is the largest win for the industry, ever.

This came from the government. Would you expect a similar increase in orders from companies?

Actually, you can look at the government as an example of what nongovernment organizations are doing: They have a small department here and there of people who are quite mobile. Now, they want to do something on a larger scale that integrates the different pieces -- Windows-based PCs and servers -- that they already have in place.

The year 2000 census was mostly done with pen and paper. They hired 500,000-plus employees to go out and knock on doors, find people and collect data. These people would come out into the Census Bureau's 500 field offices and hand over their papers to a data entry person who'd then decipher the scratches. There were inaccuracies and inefficiencies.

What they are excited about doing now is increasing accuracy, decreasing their staffing, and producing the census report much more quickly.

Do you expect this particular order to trigger additional sales for you from the public and private sectors?

Absolutely. We've been working with different divisions of the government on smaller deployments. And we think this win shows the rest of the government that Microsoft, together with our partners, can pull together the right solution that works and helps them save money. It also makes a big statement to public companies that our capabilities are there, that our security has met the government's requirements and will meet their security requirements as well.

So how much growth are you expecting, and what will drive it?

In the past couple of years, we've been doubling our growth. We are the fastest-growing division at Microsoft. And it's only three years ago that we've shipped our first product, from a single manufacturer, to a single operator in one country. Now, we work with more than 100 operators, almost 50 manufacturers in almost 60 countries.

And we will continue to grow fast. We believe that, in the next couple of years, there will be explosive growth. Thanks to niche providers like RIM, organizations have started to understand return on investment (ROI) associated with mobile e-mail.

But the big opportunity is not necessarily e-mail. We believe it lies in extending all kinds of applications onto mobile devices, being able to integrate your mobile device with your PC and with your server, which is what the Census Bureau is doing. That's what's needed to grow the number of mobile devices that are deployed around the world.

Companies have toyed with mobile devices for years. Why would they start deploying them en masse now?

Organizations have gone through a decade of trying out mobile devices. During this first testing decade, many organizations have tried wireless e-mail from RIM, from Microsoft. We've come to the point now that mobile e-mail is quickly becoming a commodity, it's available everywhere.

What we are able to do now, as Microsoft, is go to our hundreds of millions of Exchange, Instant Message and server customers and say, Mobile E-mail is important to you. We are providing that for free within your existing licensing agreement. The watershed moment is moving to different applications. It might be a different application for different organizations.

Nissan North America, which had done a big Windows Mobile deployment last year, wanted to expand its real-time sales processing onto mobile devices. It's an application showing which models are selling where, which colors are popular. There are many applications like that. E-mail is chapter one, and people are looking for more. And Windows Mobile, which supports really rich applications, is really resonating with a lot of organizations.

How is Microsoft better equipped to partake of that growth than, say, RIM?

We offer the ability to run applications on the device while it's connected or not. The approach for many other companies has been to run only certain applications, and only while the device is connected. If you are driving down the freeway and losing a call because you are driving through a tunnel, or if you are on a plane, you can still run applications with Windows Mobile. We offer more flexibility.

Why did the Census Bureau go with HTC versus, say, a Motorola Q?

Instead of going with one manufacturer and one device model, the Census Bureau can go to HTC and get a variety of devices, more suitable to the different needs of the people that they give these to.

HTC has quietly, behind the scenes, acquired a lot of credibility with operators and manufacturers around the world. All U.S. operators today are selling HTC devices. They've built the iPaq for years. They've built the Treos. They allow other companies to label their products. And they have pretty compelling price points as well.

What are you doing to push into more corporations around the world?

We are also working a lot more closely with mobile operators on joint marketing. We are working with Verizon (VZ) and Vodafone (VODA) to jointly sell to corporate customers. Microsoft has the largest enterprise sales force in the world. And we know how to run the Exchange server. You don't need special middleware. You can deploy mobile devices today.

What resources are you getting for this mobile push?

All of Microsoft is being mobilized. It's a mantra that we are hearing from [CEO] Steve Ballmer down. Steve Ballmer spends more time with telecommunications companies than with any other set of partners. He has provided the resources to our division that we've never had before.

We believe this is one of the big growth opportunities for our company. Think about it: This year, the industry will ship 250 million to 300 million PCs. But they'll ship 1 billion mobile phones this year. The opportunity is pretty clear.

Smartphones are still a small part of the overall cell-phone market, though. And most analyst forecasts indicate they will remain a small part of the market for several more years. Are the analysts wrong?

We believe that some of these analyst numbers will be conservative. Most of these estimates are based upon individuals purchasing smartphones and then bringing them into an organization. The shift that we think will fundamentally change this market and help it grow is organizations beginning to purchase devices. We hadn't yet seen that happen in the mobile space in a huge way. But now we know of the Census Bureau, purchasing 500,000 phones. We know of other organizations around the world that are looking to buy between 5,000 and 50,000 units. Those are the kind of things that are going to fundamentally change this industry.

Another factor: Microsoft is doing a lot to bring costs down. In February, we made an announcement with Texas Instruments (TXN) to build a smartphone on lower-end hardware. That's something only we have been able to do. The price is coming down, you are seeing smartphones that are under $100 with a contract. That will result in faster smartphone market growth.

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