Microsoft made its final roll of the dice in the global smartphone market today, launching a new mobile operating system which the software powerhouse hopes will rival iPhone and Android devices.
The Windows Phone 7 marks a complete break from its past efforts – and the suppression of internal politics in favour of the man and woman in the street.
Microsoft, which once dominated the computing world, is having to sprint to catch up on the lead it has surrendered in the past three years first to Apple and then to Google's Android platform. Its rivals have grabbed roughly a third of the rapidly expanding market for devices that can connect to the internet while their user is on the move, as well as making phone calls.
Steve Ballmer, Microsoft's chief executive, said that he had "been looking forward to this day for some time" as he unveiled a range of phones using the system in the US. He said that the development of the software behind the Windows Phone 7 – reckoned by analysts to have cost the company more than a billion dollars, and to have a $400m (£250m) marketing budget attached – had been driven by the necessity to be "modern in its design principles, in the way that people use modern internet services, and we've taken a very different tack at the same time".
The new interface aimed to integrate phonebooks, social networks and other information around "hubs" of people. Ballmer said: "We had an internal mantra that the customer is king … Give them the ability to do everything on their phone but easier and faster. Less stop and stare, more glance and glare."
Although its Windows operating system for standard desktop computers and Office software suite together comprise two of the most profitable monopolies on the planet, Microsoft has lagged in the mobile phone market for years. Windows Mobile, its previous incarnation, was popular among businesses for its ability to connect with enterprise email and calendaring systems. But then the Canadian company Research In Motion (RIM) ate into that field with its BlackBerry offerings, while Nokia took the broad share of the global smartphone market.
But the world really changed in June 2007 when Apple launched the iPhone, with its unlimited internet connectivity, and then Google produced Android, which mimicked many of the iPhone's strengths and could be built by many handset makers, undercutting Microsoft's business model.
Ballmer initially laughed off the challenge of the iPhone, saying it was "the most expensive phone in the world" but that it "doesn't appeal to business customers". In April 2007, he said that it had "no chance" of gaining significant market share, telling the magazine USA Today that "if you actually take a look at the 1.3bn phones that get sold, I'd prefer to have our software in 60% or 70% or 80% of them, than I would to have 2% or 3%, which is what Apple might get".
History proved him wrong – and now it is Microsoft that has the single-digit market share, and has focused squarely on the consumer, not the business customer, with its new software.
That may be essential, because markets have begun to mark down Microsoft's shares, which have fallen by 20% from their peak this year. Goldman Sachs this month downgraded the stock to "neutral", saying that PC sales were slowing in the face of cannibalisation from tablet computers, and that cumulatively the whole of Microsoft was worth less than the sum of its parts.
But Microsoft suffered a terrible misstep this year when it killed its Kin smartphone, the product of its acquisition of the Danger phone brand, after only three months of disappointing sales. That led to doubts about whether Windows Phone 7 would meet the high expectations now riding on it.
The new focus on consumers in Windows Phone reflects a realisation that they will be a key driver of smartphone sales growth. "The enterprise [customer] is still important, but we're looking to appeal to the consumer as well," said Ashley Highfield, Microsoft UK's managing director. "Consumers are actually just as much business people as they are entertainment seekers. This is for both those areas. We do have connections to [Microsoft's corporate email system] Outlook and address book and [enterprise collaboration tool] SharePoint. You can, if you want, collaborate on a PowerPoint presentation with someone who's back in the office on your phone."
Now or never
Microsoft badly needs to succeed now, as the smartphone market is hitting what Highfield called "an inflection point", with sales globally beginning to explode: the number of internet-enabled phones sold is expected to outstrip those of PCs around 2015.
The industry analyst Gartner reckons 270m smartphones will be sold this year, up 56% on last year, and growing to 875m by 2014. By contrast, it estimates that there will be only 368m PCs sold this year, up 19% on 2009.
Yet even if it can drive its market share of handset sales higher, Microsoft may still not profit as handsomely as Nokia, RIM and Apple, all of which create both the software and the hardware in their products – and for which the physical product is the most profitable part. While Google makes money from its Android platform by driving searches via its own platform and selling mobile ads, Microsoft is both charging handset makers a fee to license Windows Phone 7 and seeking search and ad revenues. The profits from those activities, though, may not be as impressive as those seen by Apple, in particular, which is estimated to have taken 39% of the mobile phone industry's total profits in the first half of 2010 by selling only 17m iPhones.
Highfield declined to forecast how Windows Phone 7 will do in the market, acknowledging instead that the launch was the beginning of "a long journey" and that the licensing and advertising model was "a very good and solid business model".
Microsoft is also looking to encourage the development of an "app store" like those offered by Apple, Android and Nokia, which have all poured millions of pounds into encouraging developers to write small "apps" that can be downloaded and used on their phones. But for the companies that developed the thousands of apps for the previous generation of Windows Mobile phones, the bad news is that they will now have to rewrite them entirely.
Ballmer has since May been the direct manager of the entertainment and devices division, which produces Windows Phone 7, after the departure of J Allard, who masterminded the development of Microsoft's Xbox games console. And since the departure of Stephen Elop from the business division to head Nokia, Ballmer has been in direct charge of two of his company's five divisions.
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