Microsoft's Wireless Deal Could Send in the Clones
By Tish Williams Senior Writer 03/15/2002 07:46 AM EST
Microsoft (MSFT:Nasdaq - news - commentary - research - analysis) made a crack in the mobile-phone world.
At the CeBIT conference this week, German telephone company Deutsche Telekom (DT:NYSE - news - commentary - research - analysis) answered the call to Windows by cementing a partnership which will bring Microsoft's .Net XML tools to mobile callers on DT subsidiary T Mobile. With 53 million callers on its international network, T Mobile is just the kind of partner Microsoft needs to chip its way into the mobile phone market.
Microsoft has set in motion a potential nightmare phone-clone scenario for handset makers. Mobile-phone makers rule their industry, with software taking a distant back seat, the opposite hierarchy of the PC world. Microsoft's efforts to elbow in on the market is highly unwelcome.
At the same time, a growing population of handset manufacturers in Asia can produce no-name generic phones in mass quantities and are willing to live with thinner margins -- similar to PC makers. Now that Microsoft has Deutsche Telekom's customer base to work with, it can use the tactics for which it is famous.
"Deutsche Telekom is a pretty big player. To a degree, if a handful of similar types of arrangements and phones start to be sold, that enables wireless carriers to demand lower prices from Nokia and Motorola," says Peter Friedland of W.R. Hambrecht. "But it's not clear how successful Windows platform phones will be."
Sidestepping Symbian
Last month Microsoft unleashed a whittled-down version of its PocketPC operating system to provide the kind of data-intensive experience the wireless sector is hoping to bring to your mobile phone. The phone market is currently dominated by the Symbian operating system, which is funded by an alert set of mobile-phone makers that have been working for years to quash Microsoft's entry into the phone business.
With Nokia (NOK:NYSE ADR - news - commentary - research - analysis), Motorola (MOT:NYSE - news - commentary - research - analysis), Sony Ericsson (ERICY:Nasdaq - news - commentary - research - analysis)and Matsushita embracing the Symbian OS for the time being, Microsoft will be forced to take a circuitous route to get its PocketPC 2002 Phone Edition to the masses. The market pictured some alliance with southeast Asian generic handset makers because the manufacturers want to sell as many phones as possible, whatever the operating system. Microsoft's matchup with Deutsche Telekom sketched out exactly how that scenario would work.
It's a brilliant plan: Microsoft makes a marketing deal to create tangible demand and then convince a generic-phone manufacturer to fill the demand. With Deutsche Telekom's help, Microsoft will make its inroads on the continent, providing Web services and .Net functionality to smart phone users. The T .Net branded services will bring corporate software staples like enterprise resource planning (ERP), workflow, calendaring and messaging to phones.
Microsoft aims to tailor its services to 2.5G GPRS and 3G networks, which is an alluring concept to carriers that have paid oodles of money to install networks but face a paucity of applications to recoup the cash from customers. As with all next-generation products, the market will believe the promises when they're delivered.
It's highly unlikely that leading European phone providers would be interested in creating phones for the project, because they do not want to propagate the kind of clone scenario that flattened PC margins and fattened PC software prices. But low-margin phone makers will be happy to help get Windows selling, especially since there is already a defined customer for the phones.
As anticipated, Microsoft has exhibited its mastery at partnerships. Similar deals will no doubt pop up around the globe. It remains to be seen whether the software maker can actually provide an operating system that will entice consumers to buy a generic phone, or if it can amass customers in more than theory.
Investors can be sure that major phone makers will be paying close attention.
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