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stratechery

Microsoft’s Mobile Muddle

Saying “Microsoft missed mobile” is a bit unfair; Windows Mobile came out way back in 2000, and the whole reason Google bought Android was the fear that Microsoft would dominate mobile the way they dominated the PC era. It turned out, though, that mobile devices, with their focus on touch, simplified interfaces, and ARM foundation, were nothing like PCs. Everyone had to start from scratch, and if starting from scratch, by definition Microsoft didn’t have any sort of built-in advantage. They were simply out-executed.

Not that that should make Satya Nadella sleep any better at night. The power of mobile is that it is always with you; it is impossible for your mobile device to not dominate your computing time. At first, said time was accretive: on the bus, in the waiting room, the seams in your life. Increasingly, though, mobile is stealing time formerly devoted to PCs, making mobile not just a threat to Microsoft’s growth, but also to their cash cows.

To appreciate the extent of Microsoft’s problems, and the possible solution, I’ve broken things down in five categories:

  1. Business Models
  2. Devices
  3. Services
  4. Patents
  5. Apps

The realities of mobile

  1. There are two viable business models: device sales and services. Licensing an operating system for profit is a non-viable business model. Android killed it.

  2. A sustainable device sales model requires differentiation (e.g. the iPhone), channel and supply chain dominance (e.g. Samsung), or extremely competitive cost structures (e.g. Lenovo and most other Chinese manufacturers). All require huge volumes to reap economies of scale.

  3. A sustainable services model requires touchpoints on as many devices as possible, a massive cloud infrastructure, and a means of monetization (e.g. Google services on all devices, not just Android, all harvesting signal to be used in advertising).

  4. Patents are a significant part of the cost-of-goods in developed markets, perhaps 15-20% of the selling price. This can be significantly more (or less) depending on the amount of patents that a manufacturer can use for cross-licensing with other smartphone manufacturers (which reduces the amount needed to paid in royalties). However, patents (and their associated costs) are mostly ignored in China, Indonesia, and other large developing markets.

  5. An extensive app store that contains not only well-known titles but day-to-day utilities like banks, airlines, etc. is no longer a differentiator but a price of entry.

Microsoft’s Situation

  1. Windows Phone (and Windows Mobile before it) was developed with the intent to license the operating system for a profit. That model is no longer viable; only 10% of Windows Phones are built by non-Nokia OEMs, and that percentage is expected to fall.

  2. Microsoft has acquired Nokia with the intent of pursuing a devices business model. However, while Lumia smartphones have great cameras and build quality, they are negatively differentiated by the lack of a competitive app store, are not built at massive scale, and have only sold successfully at extremely low prices with no profit margins.

  3. Microsoft Office has long been available on Windows Phone devices, but has only recently had a limited version published on the Apple and Play App Stores (phone only). Bing and Outlook are options on iOS, but not defaults. Onedrive is available in both the Apple and Play App Stores. Azure offers cloud resources for both iOS and Android app developers.

  4. Microsoft has an extensive patent portfolio and is reportedly earning $2 billion a year from Android device manufacturers.

  5. The Windows Marketplace has slowly captured most top apps (Facebook, Twitter, and finally Instagram), but is always years behind hot new apps (e.g. Snapchat), and has major holes in “utility” apps like banks, airlines, etc. Microsoft has zero leverage over developers.

What Should Microsoft Do?

  1. Choose between devices and services. The problem with pursuing both, as Microsoft is doing, is that strategy taxes are inevitable. If you favor your devices by giving them better services, you are by definition limiting your services on competing devices. Meanwhile, by offering your services on competing devices, you are limiting the competitive advantage of your devices. Compare this morass of a strategy with Google’s clear focus on services (Google services on iOS are just about as good as on Android) and Apple’s clear focus on devices (iCloud is only available on iPhones).

  2. Abandon devices. The devices business is only worthwhile if you are able to sell at a high margin; while this does not offer the margin percentage of software licensing, the absolute monetary value of a high margin device is significant ($300+ for an iPhone, for example). However, Lumia’s are simply not competitive at the high end; all volume to date is that the very low end (<$150), and is being sold at a loss. Moreover, Lumia volume is too low to be supply chain competitive, at least once the former Nokia feature phone business is spun off. Ideally, sell the entire division to a Chinese manufacturer that is not aligned with Google (Lenovo’s acquisition of Motorola was a blow here; they are committed to Google Android, and it will be mostly stock).

  3. Embrace services. Services seek to touch every device, and, as I’ve written previously, are much more suited to Microsoft’s culture. Moreover, Microsoft has many of the pieces already in place, along with their primary remaining trump card: Office. Microsoft should use this trump card with Apple specifically: offer Office on iPad exclusively for a specified time in exchange for Bing as the default search,1 fuller iCloud integration with Azure, and/or built-in Xcode support for Azure cloud services.2 Apple has most of the best customers – the ones who will pay for services; Microsoft needs those customers desperately, and Nadella should go hat in hand to Cupertino.

  4. Fork Android and offer a version of AOSP (Android Open Source Project) with Microsoft services, app store (more on this below), and, most importantly, patent protection to Chinese manufacturers.

    This is the most misunderstood aspect of the Lenovo-Motorola deal; Motorola was worth more to Lenovo than almost anyone else because the deal included the right to cross-license Motorola’s patents. Without the ability to cross-license patents with other smartphone manufacturers, royalty fees can balloon far beyond the 15-20% of a phone’s cost that I referenced above; this would effectively destroy Lenovo’s cost-structure advantage.3 It is for this reason that Lenovo has only sold phones to date in countries with poor IP-protection; the Motorola patents let them go abroad much more competitively.

    The situation is no different for the other Chinese manufacturers like Coolpad.4 Patents have built an effective wall against Mediatek-powered Chinese manufacturers, leaving Android-powered Samsung dominant in most developed markets; Microsoft is uniquely positioned to enable and encourage said manufacturers, who are already competing strongly against Samsung in China, do the same in the rest of the world. They would all use Microsoft services abroad in exchange for patent protection, just as they use non-Google Chinese services in China.

  5. Build an AOSP Play Store with word-for-word copies5 (to the extent technically possible) of Google GSM APIs, and incentivize Microsoft’s global platform evangelists to encourage every Android developer to change a few lines of code and submit to the Microsoft AOSP App Store. Developers won’t be upset that they are being asked to abandon their Windows Phone app; on the contrary, they will love the fact they no longer need to support a platform that hasn’t come close to providing a return on investment.

    (I am aware of Peter Bright’s article that says Android is unforkable; I find it technically accurate but misleading. Of course there are some APIs in GMS, but a tiny amount relative to AOSP, and almost all related to cloud services which Microsoft by definition wants to replace. Bright waves this away by saying it’s “too much work,” but it’s much more work trying to get developers to build entirely new apps than it is to get them to change a few lines of code to support your store. Sure, Google might try to mess things up, but far better to rely on your own ability to adjust than on developers over whom you have no leverage.)


To say this strategy would be a stark departure from Microsoft’s current course is, obviously, an understatement. It’s also the point – Microsoft’s current mobile strategy is an objective failure. With the Nokia acquisition Steve Ballmer threw good money after bad, and every moment spent pursuing a devices strategy based on a stillborn platform6 is another day that endangers the strengths Microsoft still possesses in the cloud and especially in the Office franchise.

One does wonder, probably naively, if this is the reason Bill Gates came back. To abandon an operating system strategy for an operating system company, no matter how improbable the chances of success, and to embrace one’s former rival (Apple), will require extraordinary amounts of political capital – amounts possessed by no one but the founder.

The precedent, of course, is Steve Jobs telling Macworld in 1997:

We have to let go of this notion that for Apple to win Microsoft has to lose. We have to embrace a notion that for Apple to win Apple has to do a really good job, and if others are going to help us, that’s great, cause we need all the help we can get…The era of setting this up as a competition between Apple and Microsoft is over as far as I’m concerned. This is about getting healthy, and this is about Apple being able to make incredibly great contributions to the industry, to get healthy and prosper again.

So it is for Microsoft. They need Apple and iOS, and, just like Apple had to get back to its roots of making great products, Microsoft ought to return to its roots of embracing and extending.

  1. Bing as default would surely be attractive to Apple for strategic reasons, but they could face the same blowback as Maps, and rightly so; Google is better
  2. One of the three would be a win
  3. This is one of the many problems facing HTC
  4. Huawei is an exception; they have a much more extensive patent portfolio because of their telecom infrastructure business
  5. Google has already provided the legal justification in the Oracle case
  6. Warning: Tomi Ahonen link, but I swear it’s 80% rational and a good refutation of the spin that Windows Phone is making significant progress