Surprise: That Mobile Is Running Windows

LG Electronics is the latest handset maker to get on the bandwagon and run the Windows Mobile operating system in its phones

The ads for the Samsung BlackJack mobile phone from Cingular are as slick as can be. A card dealer shuffles several of the mobile phones and fans them out, just like a magician performing a card trick.

It's a fitting metaphor, since BlackJack helped Microsoft (MSFT) accomplish a feat that seems nothing less than a sleight of hand itself. In 2006, according to market research firm IDC, mobile phone carriers worldwide sold more phones running the software giant's Windows Mobile, the operating system used inside the BlackJack and other phones to send wireless e-mail, than BlackBerry, the category-defining gadgets from Waterloo (Ont.)-based Research In Motion (RIMM). It's an astonishing turn of events for Microsoft, which stumbled for years in the mobile market.

Smartphone Collaboration

And BusinessWeek has learned that LG Electronics, the fourth-largest mobile phone maker, is developing new Windows Mobile devices. With Samsung and Motorola (MOT) already selling Windows Mobile phones, Microsoft will have three of the top five handset makers in its camp.

LG says it's working on at least two new smartphones, including devices that would use its touch-screen technology rather than buttons. The first handsets will hit the market in the second half of this year. It's a new market for the Korean company. Woo-young Kwak, LG's vice-president and head of mobile communications research and development, says the "collaboration with Microsoft will enhance LG's stance in the growing smartphone market."

Microsoft and LG are expected to announce the news at the 3GSM World Congress in Barcelona on Feb. 12. It will also unveil Windows Mobile 6, which will include improved collaboration software and better security. The first Windows Mobile devices will arrive in the spring.

Watershed moment

For Microsoft, the mobile phone business has been marked more by defeats than victories. When it pushed into the business in 2002, handset makers and mobile phone carriers balked, worried that the software giant would try to marginalize partners, squeezing the lion's share of profits for itself just as it has in the PC business. What's more, its software was clunky, and a battery hog to boot, making devices running it unappealing.

The turning point came in September, 2005, when Microsoft convinced longtime rival Palm (PALM) to put Windows Mobile inside its popular Treo device. Microsoft Senior Vice-President Pieter Knook calls it a "watershed moment" for Windows Mobile's legitimacy. Over time, the company became more willing to let handset makers and carriers define the customer experience, as long as users tapped into e-mail servers running Microsoft's Exchange software.

Squeezing the BlackBerry

Since then, a handful of slick designs have propelled Windows Mobile, everything from Motorola's slim Q to the more rounded Dash, made by Taiwanese contract manufacturer HTC (see, 4/13/06, "The Hottest Tech Outfit You Never Heard of"). "It gives them a real advantage on a choice standpoint," says Kent Mathy, president of the business market group at Cingular, which also sells the BlackBerry. That diversity only grows with the LG deal.

The high-end handsets with big screens and the ability to handle spreadsheets led Cantor Fitzgerald & Co. to replace BlackBerrys with Windows Mobile devices for its roughly 1,500 employees who use smartphones. The process should take about two years, as employees' service contracts expire. Part of the reason for the switch: The financial-services firm was able to develop and deploy software its bond traders use to buy and sell in real time for Windows Mobile phones.

"It's a much more powerful device," says Brent Wilkins, a Cantor managing director in charge of the firm's wireless technology initiatives.

Microsoft also helped itself by changing its approach to the business. Handset makers and mobile phone carriers have been nervous about working with the software giant, fearing that it would marginalize them. But in recent years, the company has focused more on using Windows Mobile to enhance its Exchange e-mail server software business, so much so that the most recent version of the product includes technology to push mail to users. RIM sells that technology. "It's a very crafty strategy on Microsoft's part," says IDC Group Vice-President Randy Giusto. "It puts some pressure on RIM."

Disputes the Numbers

Those improvements, along with the global familiarity with Microsoft's software, helped it leapfrog BlackBerry. IDC's estimates for 2006 worldwide market share for so-called converged devices—mobile phones that can handle e-mail and surf the Web—put Microsoft's share at 9.8%, compared with 7.3% for BlackBerry. Still, BlackBerry held the U.S. lead through the first nine months of 2006, with a 49.4% share versus Windows Mobile's 29% share. And worldwide, both significantly trail Nokia (NOK)-backed Symbian, the mobile-operating system that's huge in Europe and Japan.

But even as BlackBerry works to expand its business globally, IDC believes that Microsoft will grow share faster. It projects BlackBerry share to climb to 9.2% this year and work its way up to 10.4% by 2010. At the same time, Windows Mobile's trajectory is much more rapid, expected to hit 22.1% in 2010.

RIM co-CEO and Chairman Jim Balsillie disputes IDC's data, saying that BlackBerry's worldwide share still tops devices running Windows Mobile. He declined to share proprietary numbers that he claims refute the IDC numbers, instead offering anecdotal evidence. "If Windows Mobile is selling so much, where are they?" Balsillie asks. "I don't see them." As for Microsoft gaining momentum, Balsillie says, "I haven't seen it" (see, 12/22/06, "Research In Motion's Record Year").

There's little question Microsoft still has much work ahead. Some tech buyers remain leery of Windows Mobile security, while some handset makers are still wary of working with the software giant. But with LG onboard, Microsoft shows it still may have some tricks up its sleeve.

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