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Windows Phone 7: Tipping the Scales of the Smartphone Market

[Windows Phone 7 has the potential to redraw the smartphone competitive landscape and accelerate the evolution of the mobile value-chain. With the arrival of WP7 just around the corner, VisionMobile Research Partner Michael Vakulenko explains what success of the platform can potentially mean for the industry and why Microsoft's mobile comeback should be closely watched.]
This article is also available in Chinese

Windows Phone 7: Tipping the scales of the smartphone market

Just over a year ago I had written how Apple’s iPhone and Google Android will capture leadership positions in the smartphone race, leaving behind all the legacy smartphone operating systems. Indeed, one year later iPhone and Android are confidently cruising ahead on the tailwinds of consumer, operator and developer ecosystem support.

Symbian continues to submerge into irrelevance distracted by its venture into open-source waters. The only two handset makers who are members of Symbian Foundation board recently jumped the ship. Both Samsung and Sony Ericsson lately said that they do not plan any new Symbian handsets. Worst yet, major chipset makers are scaling down their efforts to support Symbian. The direction is clear: Symbian is soon to become Nokia-only internal OS hidden behind Qt application framework.

RIM is steadily drifting towards mid-, low-end of the smartphone market. Contrary to common perception, enterprise users are no longer the platform’s most important audience. Over half of the subscriber base and 80% of Blackberry growth comes from the consumer space. The reason is the viral effect of Blackberry Messenger application popular with teenage kids and college students.

Contrary to Nokia and RIM, Microsoft took proactive approach. Instead of patching the leaking boat of Windows Mobile, the Redmond giant build ground-up a new smartphone platform carefully designed to address challenges presented by iOS and Android.

Make no mistake, Microsoft’s primary motivation for Windows Phone aren’t its software licensing fees. The real motivation is the need to protect Microsoft core businesses of Windows and Office product lines. Mobile and smartphones became pervasive. Microsoft must have a convincing mobile story to prevent increasing numbers of users churning to Apple and Google product ecosystems.

There are reports claiming that Apple sells just as many computers as Dell to college students. Naturally, a decision to buy a Mac is much more easier for a person already owning an iPhone. A person regularly using GMail or Google Apps on a PC and Android phone is much more prone to dropping Outloook, Word, Excel and PowerPoint in favor of cloud-based alternatives from Google.

With absolute majority of Microsoft operating profits coming from licensing of Windows OS and Office applications, the software giant cannot afford losing users to Apple or Google. Both Windows and Office must be augmented by the ‘mobile screen’ to remain competitive.

A comeback in the making?
Based on pre-release information, Windows Phone 7 has all the necessary ingredients to become a powerful contender in the smartphone race.
First, there is clear differentiation thanks to fresh user interface and deep integration with Microsoft on-line services and products.

The UI and the interaction model are based on well-received Zune HD Player (funnily enough there is Zune Home app on Android Market, which replicates Zune HD look & feel on Android). Finally we see refreshing departure from icon-based navigation that became de-facto standard following iPhone introduction.

The user experience is closely integrated with Windows Live, Xbox Live, Bing Maps cloud services, Zune content platform, together with pervasive Office and Exchange. Microsoft has impressive number of users registered for its on-line services – 360M Hotmail accounts, 299M Messenger accounts, 23M Xbox Live subscriptions. This will certainly help driving Windows Phone adoption.

Second, when it comes to developers Microsoft is playing on its home ground leveraging established developer ecosystem and excellent development tools. Windows Phone 7 application development is based on Silverlight UI framework and XNA game runtime. Both are well-known to large number of PC and Xbox developers eager to apply their skills in mobile environment. Consider that Windows Phone 7 Beta SDK was downloaded 200,000 time in just 2 days since its general availability. Instead of wresting developers from iOS and Android platforms,  Microsoft can tap into large pool of loyal .NET and XNA programmers, converting them into an army of mobile developers.

Developer monetization is high on Microsoft’s agenda. Windows Phone Marketplace avoids the pitfalls of the competing platforms promising predictable and transparent approval process, lack of handset fragmentation, localization, try-before-buy model, app beta testing program, and tools for active promotion of the content in the Windows Marketplace.

Third, operator billing supported by Windows Phone Marketplace will be instrumental in winning operator subsidy and marketing budgets from iPhone and Android. These budgets are critically important for the platform success. Windows Marketplace already supports operator billing for older Windows Mobile platform. This experience will help Microsoft quickly introduce operator billing for growing number of operators. Sure enough, Microsoft can be flexible on splitting 30% of app sales revenue share with operators. Not surprisingly, all five major UK operators will be selling Windows Phone 7 handsets at launch.

All these combined with familiar consumer brand and a huge $500M marketing budget (more than 5 times bigger than any previous Windows Mobile launch) makes Windows Phone 7 a convincing entry to the smartphone game. This entry is already supported by a lineup of handset makers from experienced mobile players like Samsung, HTC and LG, to PC specialists like Dell and Asus.

So what’s the catch? Windows Phone success will ultimately depend on Microsoft’s ability to execute on the promise. Microsoft will need to deliver solid product experience, prove monetization potential for operators and developers, and keep the momentum by following up with subsequent platform versions. Without these, Windows Phone 7 will only remain a great promise.

What will Windows Phone’s success mean for the mobile industry?
The mobile industry has radically changed in the recent years. In an industry where the only constant is change, what impact will the success of Windows Phone have on the mobile industry?

The hardware specs of leaked Windows Phone handsets from HTC, Samsung, LG, Dell, Asus and Toshiba reveal striking similarity between the models. All are based on QUALCOMM’s Snapdragon chipset. The variations are limited to industrial design, amount of memory, optional physical keyboard and FM radio. Are we entering PC-like era in smartphones, where industry will converge on a small number of hardware configurations? Will we see emergence of ‘Wincomm’ alliance in mobile similar to ‘Wintel’ in PC? Value-chain evolution theory says this is not question of ‘if’, but the question of ‘when’. Windows Phone 7 looks like a natural catalyst for this to happen much sooner than some companies would hope for.

This will be great news for low-cost ‘assemblers’ like Dell, Acer and Asus, who lack significant software capabilities and experience. With Windows Phone software and QUALCOMM’s support these companies can readily replicate their PC business models, brands and experience, while thriving on single digit operating margins. To do so, they only need to focus on building hardware platforms for Microsoft software, while leveraging pre-integration with QUALCOMM chips for fast time to market. Microsoft definitely learned from mistakes made with Windows Mobile. This time the approach is closer to the PC model: ODMs are given exact specification of how the hardware platform should look like. From the screen size, to amount of memory, to number of navigation buttons on the device.

For low-cost ‘assemblers’ Android proved to be too difficult to productize. Dell Aero is one example, which is four Android versions behind now. Using Windows Phone software will significantly lower barrier to entry on the software side. Paying software licensing fees to Microsoft may prove a better way forward than a crappy product that doesn’t sell.

On the other side, these will be very bad news for high-margin branded OEMs like Motorola and Sony Ericsson. Such OEMs will have little chance to protect their business from increasing competition from low-margin assemblers. Adopting Windows Phone won’t help: Microsoft is determined to maintain tight control over the platform and limit OEM differentiation opportunities.

Increasing smartphone commoditization accelerated by the entry of low-cost ‘assemblers’ will certainly put strain on today’s leaders, Apple and Google. Apple seems to be well-positioned to keep its positions in the mid-term. But will we see its vertical integration becoming a liability in the next phases of value-chain evolution? The phases where flexibility and customization of commodity products will favour modular solutions.

For Google things can quickly get challenging. Android is yet to grow into a recognizable consumer brand being concealed by operator and handset maker brands (e.g. Droid and Sense). What if Android will get squeezed between style-conscious consumers opting for iPhone and masses of mainstream users opting for the comfort of familiar Windows brand? Will we see Android slowing down and struggle outside the group of tech-savvy users?

What about mobile operators? Windows Phone success will increase the dominance of non-mobile players in the mobile ecosystem and their control over user experience. The distance between user and operator will inevitably increase, and we will see more and more mobile operators settling on the role of a ‘pipe’ satisfied by getting a share of app and content sale revenues.

Tipping the scales of the smarpthone market
If successful, Windows Phone 7 will catalyze further shifts in the mobile industry bringing PC-style commoditization and increasing distance between operators and their subscribers.

Microsoft and low-cost, PC style ‘assemblers’ will be the main winners driving smartphone price declines. High-margin branded OEMs will have no choice but to look for new ways to create value to operators. This is to snatch critically important subsidy and marketing budgets from Apple and RIM.

Apple and Google won’t wait long to make Microsoft’s life harder. Google can be exposed on multiple fronts and finally will have to pay closer attention to operator and developer interests.

Things will continue to be interesting in mobile in the foreseeable future.

How do you think things will shape up with Windows Phone? Who will be a winner and who will be a loser?

- Michael

[Michael Vakulenko is a Research Partner at VisionMobile. He has been working in the mobile industry for over 16 years starting his career in wireless in Qualcomm. Michael has experience across many aspects of mobile technologies including handset software, mobile services, network infrastructure and wireless system engineering. He can be reached at michael [/at/] visionmobile.com]

  • http://blog.radvision.com/voipsurvivor Tsahi Levent-Levi

    Michael,

    Great post though it paints a bright future for Microsoft which I am not sure it deserves.

    The only two things that are going for Microsoft with Windows Phone 7 as I see it are:

    1. The ability to leverage their large existing developer base on the PC

    2. The linkage they are making of the system with Xbox

    They can easily blow up the first one by providing bloat-ware (lets hope they don't), and the second one is relevant for a small (and important) portion of the customer base.

    It would be interesting to see how this will turn out, as this might be the only other option available to those that want to differentiate themselves from the Android crowds.

    Tsahi

  • Jody

    "Symbian is soon to become Nokia-only internal OS hidden behind Qt application framework."

    So, how is this different than an Apple-only internal OS hidden behind Cocoa application framework?

    And why is that a bad thing?

    Or for that matter a Microsoft-only internal OS hidden behind a Silverlight application framework, which is what Windows Phone 7 really is. It is the same old Windows CE underneath. So I dispute your comment that MS built an entire new platform. All they did was put a new app framework on top, exactly like Nokia with QT.

    And it seems very difficult for anyone to differentiate themselves with hardware for Windows Phone 7. The hardware specs of all devices are basically exactly the same as the Android ones. The only difference being the number of buttons on the front. So any choice between MS and Android comes down to software preference and app availability. In the US it also looks like Verizon is sticking with Android for quite a while yet as there are no CDMA Windows Phone 7 devices coming. So, I can't see much opportunities for MS in the US competing with the iPhone on AT&T.

  • Nagz

    Nice article Michael !

    @ Jody,

    WP7 is little early to Symbian in terms of OS behind the respective framework…

    However that THERE is a lot of INTEGRATION of whole of products/services (Ofcourse these are microsofts') in WP7…

    which drives is for sometime for now.

    Also the UI is definitely is differentiated from that of any Smart-OS on the planet :)

    However this does not stop Andriod (expect in Gingerbread) and Meego to have a similar look and feel

  • Michael Vakulenko

    Thanks for the comments.

    @Tsahi

    WP7 shows great potential, but still will need to prove itself. MSFT can blow it on multiple occasions. Let's see if they can deliver.

    Indeed, WP7 can be a good option to second-source Android. Even HTC is on board big time, with their CEO speaking highly about the platform.

    @Jody

    The idea behind taking Symbian open-source was to accelerate innovation and reduce software development costs for Nokia. The result is the just opposite. The OS development stalled due to move to open source, and after two lost years, Nokia is back to where they have started, or even worse: Being the only company behind the OS.

    @Nagz

    Yes, integration of product/services in WP7 is crucial for the platform success. It's not about the OS in technical sence, but about platform for advancing other products and services.

  • Avrum

    Brilliant as usual !

    Michael, don't you see the XNA's as potentially best migration path of all XNA games (especially high end) to Phone platforms making it the leading gaming mobile 'machine'?

  • Gabriel

    Nice article Michael, lets see what MSFT can do with this "new" OS. But, like you said WP7 shows great potential. The integration of product/services looks very interesting for me, especially office and outlook (hotmail too).

    You are right about Nokia, they are alone with Symbian now. They lost two years, now we just have promises about meego or something.

  • http://itaas.ru Peter

    Nice article. Thanks Michael.

    It gives me many positive thinking about future of WP7. Let's see how market will react for this real platform.

    I use iPhone 3G now and don't want to upgrade for 4G (don't see any value) or migrate to Android, because of fragmentation of this OS like with Linux – to many versions, Android market is not available in Russia, many versions of Appstores (Android market, HTC market, Amazon market – just like it was with Winmobile).

  • Jay

    "If successful, Windows Phone 7 will catalyze further shifts in the mobile industry bringing PC-style commoditization and increasing distance between operators and their subscribers."

    This is a chicken-and-egg scenario, since the success of WP7 actually depends on being able to commoditize the market.

    Microsoft's strength really lies in coming from behind and comoditizing somebody else's innovation. (I'm talking about real innovation, and not Office 2003 to Office 2007 type of stuff that Microsoft likes to call innovation.)

    This is an ideal setup for Microsoft to replicate that model of suceess. IMHO, one of the biggest factors in this will be the penetration/adoption in large and high-growth mobile markets like the BRIC countries.

    In those markets, handset price is the key. In India, the fastest growing and second largest mobile market, operators do NOT subsidize handsets, so initial handset price is absolutely critical to mass-market adoption.

    If the phones are priced below 10,000 Rupees (about $200), it will be a winner. If it's above 15,000 Rupees (~$300), it will be limited to a small segment of the high-end market. Let's wait and watch…

  • Fanboi

    The most balanced analysis I have read.

    Last commenter underestimates the poential in India – smartphones costing upto Rs. 24,000 do have a good uptake, although it cannot be characterised as "mass market".

  • http://www.WindowsPhone7pr.com Edwin

    Great article!!!!!!

    The best article that I read about Microsoft strategy.

    I want to translate it to Spanish.

  • MSFan

    All good, but with all the upcoming devices having only 8GB of memory onboard, I just can't see ppl buying them. Where to store the music? And then install any apps!

  • vlgtra

    Symbian will continue to dominate the market for at least 5 more years. MeeGO is also an important addition

  • http://www.modul8.com/ Mi chaelB

    Great article !

    I think Microsoft was smart to copy some of the successfactors of Apple :

    - thight hardware limitations : The iPhone has so many high quality apps because developers know the screenresolution well. The Android and Windows Mobile devises have so many resolutions that your interface layer of your App is probably bigger than the functional layer.

    - Marketplace: just like Apple's AppStore Microsoft designed 'the only place to go to when you want an App', above that they produced a great requirement spec document that will tell you all the secrets to be sure your app gets in the store (no secrets). Another great thing is that Microsoft only takes 30% of the price you ask, less than our friends at Apple. And last but not least, there is a limitation (5) on free apps you can publish, which will only increase the Marketplace quality.

    - Push notifications: work similar as those of Apple, but as a developer you have 3 ways to integrate them in your app, because of the Metro interface

    As it goes in the IT business, good things are copied and enhanced, add to this a new User Interface and User Experience, and the ingredients to success are on the table.

    I only hope that the sober user interface can please the world.

    @MSFAN: The 8 GB storage is the MINIMUM that Microsoft outlines. There is already 1 manufacturer that has 16 GB. And if I'm not mistaken is the extra memory via an exchangable memory card, so no real boundaries there.

  • David

    I think there are still some major barriers to widespread OEM adoption:

    1. Royalty fees need to be justified vs Android.

    2. Go to Market reference designs backed by semiconductor companies. Needs to allow the ability to differentiate.

    3. Proof that MSFT can keep up in the market

    4. Proof of user acceptance and user demand for this new design.

    5. Compelling roadmaps, prompt bug fixes, quick addition of missing features, and stability. Open source allows OEMs to feel that they are not beholden to a single company to resolve issues or support new features. I think that was the initial appeal of Android.

    6. Compelling services – MS services are not necessarily leaders in their category. MS has yet to prove that they have done anything 'game-changing' – and show how their deep integration with Exchange benefits the business user.

    Just my 2 cents. My impression is that MSFT is trying hard and OEMs/ODMs will give it a shot but will certainly not put all their eggs in the MSFT basket.

    If this is a defensive move to prevent intrusion into their markets, why don't they think a bit more out of the box and give it away for free and open source it?

  • Chuck

    1. Android is free, Window Phone charge license fees.

    2. The "assembler" phone companies will trigger a race to the bottom, just like the one that has taken all the $$ out of the PC hardware market.

    3. "The real motivation is the need to protect Microsoft core businesses of Windows and Office product lines". That's true, and it means compromised choices. Microsoft is playing defense, while iPhone and Android play offense.

    4. Windows Phone may appeal to the IT trolls at companies who'll see it as a choice over Blackberry, but the consumers couldn't care less about "Exchange compatibility"….95% don't even know what that is.

    5. "First, there is clear differentiation thanks to fresh user interface and deep integration with Microsoft on-line services and products." The user interface innovation is tiles with alerts; that's it. As for Microsoft's on-line services, the world cares about NON-Microsoft on-line services, like Facebook. This very weak "differentiation".

    6. No CDMA phone at release; meaning ATT only in the US. But, yah, I'm sure that legions of iPhone users are going to abandon the device and switch to whatever Windows "Phone" ATT will be peddling.

    The only good thing I see about Windows Phone is that Microsoft will push back against the worst atrocities of the carriers, who are now doing all sorts of horrible things to Android, installing crapware, etc. Ironically, Apple and Microsoft will be, in some sense, allies on this, because they both want to wrest control from the carriers.

    I don't think this will be the debacle that the Zune was, but I don't see a smashing success either. At best, Windows Phone will be in a struggle for a distant 3rd place behind Android and iPhone.

  • Tim

    @Chuck

    "The user interface innovation is tiles with alerts; that's it."

    Clearly you either haven't spent any time with the UI or you know absolutely nothing about UI. Either way, that's a ridiculously incorrect comment.

  • Peter

    Everyone (google, apple, ms, rim, nokia) will fail when facebook will release their mobile OS with FULL integration on facebook.com … i think they have enought money to hire outsource company like one i'm working for

    I'm just joking =)

  • http://jeremyjustice.net Jeremy

    Hi Michael,

    Good article, it'll be interesting to see how the intro of WP7 will play out. I could easily see things going the way you stated…Windows could definitely take a chunk of Android on the fact that MSFT can provide the united front that Android cannot. They have more years of experience with fragmentation and how to handle it. It'll just be interesting to see how they leverage their relationships with existing OEMs to bring these phones to market. They really need someone with a good hardware brand to make it work. I'm just not sure who that really is for them though…

    I'm also a little concerned about their lack of a core fan base. Apple has…well…Apple fans. And Android has a portion of the tech/open-source guys to hype them up. Who are the core WP end-consumers? If they hope to drive this acceptance through their marketing and their partners, I'm not sure they'll make it. Any thoughts in this area?

  • http://meedabyte.wordpress.com Simone cicero

    Ciao Michael,

    The piece is good since it identifies windows phone as a not negligible player but, I'm afraid that's a bit too optimistic. Certainly MS has a brand (even if its brand image on mobiles is quite bad) but the new Wp7 despite being so promising in terms of UI and product concept, still need to prove its ecosystem appreciation.

    It starts by being OEM adverse (royalties, tight specs control, almost no customization) and that's for sure a bad start. The appeal of the application development runtime is yet to be understood: even if download numbers sound promising, its indeed based on platforms new to mobile development that also make me foresee a quite steep learning curve.

    I'm sure that WP, as a product, makes sense: I'm a bit afraid that Ms strategy doesn't, still, at this stage.

  • http://twitter.com/TektonikShift TektonikShift

    Will the upshift from windows mobile 6 to WP7 will be like the upshift from Vista to Windows 7?

    Maybe.

    Be interesting to see what Nokia does….

    Is it even feasible to expect an Microsoft-Nokia alliance? Such an alliance can take out RIMM.

    -Tek
    http://twitter.com/TektonikShif

  • Tada

    Good stuff, interesting point on how a mobile phone OS usage affects other software products and services.

  • Vins

    Excellent article Michael!

    The statements like the platform is more attractive to 'less-experienced' ODMs/OEMs and the operators may get more alienated from end consumers are insightful.

    Thanks.

  • albertpaul68

    Thanks for your article, i not only like but appreciate you on your article. actually i want to write more but this time i am busy on collect the material about testking 350-001 for get knowledge more and more. I also offer you to contribute with me for this.

    have a nice day

    Albert

  • Daniel

    Excellent article. I have a windows phone 7 and it rocks!

    Best,

    Dani

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