At a recent Churchill Club gathering, Microsoft CEO Steve Ballmer summed up Apple’s approach to product design:
“Apple’s a good company, I won’t take anything away from them, but they have a certain kind of strategy. They believe in putting the hardware and software together, they don’t believe in letting other people make it.”
The 1 Microsoft Way
When asked about smartphones, he was ready to declare not only Apple but Nokia and RIM losers as well since they both have their own OSes tied to their own hardware. While Nokia may lead with 30% of the smartphone market today, Ballmer said, “If you want to reach more than that, you have to separate the hardware and software in the platform.”
Microsoft’s own smartphone market share has been idling at about 10% for some years now, despite the company’s efforts to boost it. Strategy Analytics estimates that Microsoft charges its licensees $8-$15 per phone and Ballmer said the company will continue to charge a fee for its mobile OS. “I think by actually charging money people know exactly what our motivations are,” he added. And to further emphasize its limited role as a software platform vendor, “I do not anticipate us building a phone. Sorry, we are not going build one,” Ballmer concluded.
Is Ballmer prophetic?
Ballmer saw no hope for the iPhone. He famously declared last year: “There’s no chance that the iPhone is going to get any significant market share. No chance.” He literally laughed at iPhone’s prospects (video). Is it possible then for a product that integrates hardware and software to get out of the novelty ghetto?
Apple’s iPod/iTunes empire controlling better than 3/4 of the music market is proof positive that it is indeed possible for a vertically integrated product to achieve market dominance. Ballmer clearly knows this because his company has spent the last five years trying to corral its partners to take down Apple. Here’s Bill Gates in 2005:
Apple is doing things the way Apple does – where it’s the Apple hardware and the Apple store. That’s great for them. We’re doing it the Windows way … In the long run, there will be a lot of people making digital music players, and we think that there will be a very different market share with dozens and dozens of companies. And other than Apple, all those player makers are signing up to work inside the Windows PlaysForSure ecosystem.
Unfortunately, the approach that made Microsoft’s desktop monopoly so lucrative didn’t work in a highly competitive market. Steve Jobs was among the first who saw the handwriting on the wall in 2006:
The problem is, the PC model doesn’t work in the consumer electronics industry, where you’ve got all these companies and some does one thing and another does another thing. It just doesn’t work. What’s going to happen is that Microsoft is going to have to get into the hardware business of making MP3 players. This year. X-player, or whatever.
Indeed, it didn’t take long for Microsoft to abandon its PlaysForSure ecosystem. The company actually turned around and introduced Zune without licensing it to anybody else and competing directly against its erstwhile partners.
Zune was a derivation of Microsoft’s XBox gaming strategy of vertically integrating not only the OS and hardware but content and services as well. It was a clear repudiation of its long-standing platform proposition: any device, any store, as long as its our platform.
Not having fundamental convictions as part of its DNA, Microsoft is clearly conflicted on this issue. In a memo detailing organizational changes this summer, Balmer once again flip flopped:
“In the competition between PCs and Macs, we outsell Apple 30-to-1. But there is no doubt that Apple is thriving,” he wrote. “Why? Because they are good at providing an experience that is narrow but complete, while our commitment to choice often comes with some compromises to the end-to-end experience. Today, we’re changing the way we work with hardware vendors to ensure that we can provide complete experiences with absolutely no compromises. We’ll do the same with phones – providing choice as we work to create great end-to-end experiences.”
Predictably, Microsoft has come to a fork: go it alone or partner? Follow the Zune strategy and come out with a “ZunePhone”? Or continue the current “one OS, many hardware partners” strategy that clearly failed in digital media?
That decision, which can make or break Microsoft in the mobile space, is all the more acute because its Windows Mobile platform is deeply stuck in an aged WIMP paradigm. Microsoft’s rate of innovation has crawled down to 3+ year major-upgrade cycles. The company already missed its 2008 mid-year projections by 10% and dropped to third place behind Symbian and RIM in smartphone sales. By the time a Windows Mobile 7 comes out, Apple, for example, will likely have 30+ million iPhone users and a formidable portfolio of patents. Following its hugely successful iPod strategy and supply chain management, Apple has also been a price leader, even undercutting many Asian Windows Mobile handset manufacturers.
This time around the stakes are even higher in the huge cellphone business and there is more competition than just the vertically integrated Apple. Nokia has by far the largest market share, RIM has been very successful with its enterprise oriented smartphones , and now Google has entered the fray replicating Microsoft’s own strategy of separating hardware from software. However, unlike Microsoft, Google is commoditizing the mobile OS by giving away Android. Perhaps foretelling, the long time Microsoft partner HTC was the first manufacturer to release a Google Android powered phone, the G1.
In the next article, we will explore why Microsoft’s “one OS, many hardware partners” strategy isn’t likely to be successful in a competitive market by contrasting the iPhone against Android which seems to embrace and extend Microsoft’s platform strategy.