Microsoft Gets Its Mobile Runnin'

A host of new wireless deals position Microsoft to challenge market leader Symbian.
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A recent string of partnership announcements means more business for

Microsoft's

(MSFT) - Get Report

fledgling mobile unit.

But don't assume it's a natural for the world's largest software maker to duplicate its desktop success in the wireless world.

In addition to taking on the popular BlackBerry email device from

Research In Motion

(RIMM)

, Microsoft faces an even larger battle against heavyweight

Symbian

, the market leader in the worldwide smartphone market.

The Symbian operating system, developed through a London-based joint venture of wireless and electronics companies, commands a sizeable lead over Microsoft's Windows Mobile OS overseas.

In the U.S. it runs on only six smartphone models. But as the smartphone market gains ground in the U.S., Symbian is gearing up for a bigger showdown against Microsoft. One salvo could come as early as this week with Symbian announcing another handset win in the U.S.

"I'm not prepared to make an announcement but would say 'watch the space this week,' " Symbian's vice president of U.S. operations Jerry Panagrossi said in an interview Wednesday.

Already this week, coinciding with the Cellular Telecommunications and Internet Association convention in San Francisco, Microsoft Mobile announced two major deals.

On Tuesday, the software behemoth joined

Motorola

(MOT)

and

Sprint Nextel

(S) - Get Report

in announcing the first Windows Mobile-based, push-to-talk smartphone, which will take advantage of Nextel's walkie-talkie network.

That announcement came a day after PDA pioneer

Palm

(PALM)

announced it would use Windows Mobile in its next Treo smartphone, which until now has exclusively used spinoff

PalmSource's

(PSRC)

operating software.

The Microsoft-Palm partnership was widely viewed as a move aimed to squash BlackBerry in the PDA market. But given Symbian's well-heeled backers and its track record in Europe and Japan, Symbian stands as a greater challenger to Microsoft in the more prodigious smartphone market.

Palm became the 42nd licensee of the Windows Mobile system, which nabbed its first phone customer just two years ago. Sales in Microsoft's Mobile and Embedded Devices division reached $337 million in the fiscal year ending in June, up about 36% from a year earlier. The unit is now roughly breaking even.

The Palm announcement, though widely expected, was still a significant coup for Microsoft and a considerable hit for rival PalmSource, which has been losing market share.

In the second quarter, PalmSource held only 9.5% market share of the total smart mobile-device shipments worldwide, down from 22.5% a year earlier, according to industry researcher Canalys.

But PalmSource's loss hasn't necessarily translated into gains for Microsoft Mobile. Microsoft's worldwide market share also fell in the second quarter, to 15.9% from 22.9% a year earlier.

So, who

is

gaining? Symbian -- the product of a joint venture of

Nokia

(NOK) - Get Report

, the world's largest handset maker;

Sony-Ericsson

;

Siemens

(SI) - Get Report

;

Samsung

; and

Panasonic

.

Symbian's market share soared to 62.8% in the second quarter from 41% a year earlier. In fact, the 7.8 million units shipped with the Symbian OS in the second quarter alone surpassed the 5 million Windows Mobile shipments reported by Microsoft in all of its fiscal year 2005.

"Obviously,

Microsoft's got a long way to go so far, but if it can continue to bring new licensees on board and encourage existing licensees to come to market with new devices and a range of devices, it can continue to gain momentum," says Canalys analyst Rachel Lashford.

But Microsoft Mobile catching Symbian doesn't look likely, says Philip Solis, a senior analyst with ABI Research. "I would venture to guess that Microsoft will probably, in the end, gain some market share, but Symbian will remain dominant," he says. "They

Symbian have a big lead."

Worldwide Total Smart Mobile-Device Market
Symbian holds a commanding lead.

Source: Canalys

The bulk of handsets using Symbian are sold in Europe and Japan. But Symbian's Panagrossi believes the smartphone market should take off in the U.S. next year when the number of subscribers to standard wireless services reaches a saturation point.

Currently, smartphones in the U.S. account for less than 5% of total mobile phones sold, Panagrossi estimates.

But similar to what happened in Japan and Western Europe, as subscription growth slows, U.S. wireless operators will start pushing other add-on data services to drive sales, which in turn will make smartphones more attractive, Panagrossi says.

He sees that happening next year when total U.S. subscribers -- currently at about 180 million -- reach 200 million.

Despite the looming face-off, however, Symbian and Microsoft are approaching the U.S. market differently. Symbian is pursuing a mass-market strategy, as it has abroad, by licensing to 15 of the leading handset manufacturers. A total of 54 phones now ship with the Symbian OS worldwide, and another 50 are under development.

But Symbian also is eyeing what it calls the "mass market in the enterprise," evidenced by a recent announcement that database giant

Oracle

(ORCL) - Get Report

will support Symbian, Panagrossi says.

In addition to its backing from the largest wireless manufacturer, Symbian has another advantage over Microsoft: a larger community of developers creating third-party applications for Symbian smartphones, ABI's Solis says.

Microsoft, however, does have more than 18,000 applications built for its Windows Mobile platform, which is closely integrated with the company's broader developer tools called Visual Studio .NET, says Scott Horn, general manager of Microsoft's Mobile and Embedded Devices Division.

Microsoft Mobile is certain to benefit from an even broader network effect as it targets the enterprise market, or what Horn calls the "mobile information worker." For instance, Microsoft's update of its Exchange email server product at the end of the year will enable Microsoft Mobile to offer "push" email services, or virtually immediate email.

Such integration is certain to be appealing to the whopping 130 million users already tied to Microsoft Exchange servers through their jobs, says Tim Bajarin, principal analyst with Campbell, Calif.-based technology consulting firm Creative Strategies.

"In that sense, the Microsoft Mobile platform gives a very serious alternative to any of the other operating systems aimed at corporate America," Bajarin says.

Also, don't discount Windows Mobile's tie to other ubiquitous Microsoft applications such as Word and Excel. "Microsoft

Windows Mobile has the familiar look and feel of typical Microsoft software which is on your PC. They try to keep the user experience consistent," Solis says. "It has that advantage there."

But even as Microsoft focuses on the enterprise, the company recognizes that smartphone customers are unlikely to have one device for work and another for personal use, Horn says.

As a result, Windows Mobile 5.0 -- the latest release of the operating system, announced in May -- allows users to get personal email from services such as Microsoft's Hotmail,

Yahoo!

(YHOO)

and

Google's

(GOOG) - Get Report

Gmail.

"We recognize we need to plan for a broader market space" in the longer term, Horn says, suggesting that it may ultimately make more sense to call on consumers first -- as Symbian is doing.