How could Microsoft’s Windows Phone licensing business model stand a chance against Google’s free and open Android? None of the Redmond giant’s complicated countermeasures worked—its smartphone platform is dead. And yet, inexplicably, Microsoft failed to use a very simple move, one we’ll explore today.
Just back from three weeks in France’s heartland, I see Microsoft’s fresh and well-received fourth quarter fiscal year 2017 results. The numbers acknowledge what was already notorious: Windows Phone is dead—“Phone revenue was immaterial and declined $361 million.”
This doesn’t come as a surprise. Despite Microsoft’s strenuous efforts to breathe life into its smartphone platform and devices, Windows Phone had been on an inexorable downward slope for several years, confirming a Horace Dediu theorem [as always, edits and emphasis mine]:
As far as I’ve been able to observe, any company in the mobile phone market that ended up losing money has never recovered its standing in terms of share or profit.
Let’s recall that, in Sept. 2010, Redmond employees held what CNET called a “tacky ‘funeral‘” for iPhone and Blackberry. One wonders how they’ll memorialize Windows Phone.
The gross failure of what once was the most powerful and richest tech company on the planet led to a search for a platform killer. Detectives didn’t think they had to go far to nab a suspect: Android. Microsoft’s Windows Phone was murdered by Google’s smartphone OS. How could Redmond’s money-making software licensing business model survive against a free and open source platform? Case closed.
No so fast.
Microsoft’s smartphone troubles started well before the birth of Android. In a reversal of the famous dictum “victory has many fathers but defeat is an orphan,” Windows Phone’s collapse seems to have had many progenitors deeply embedded in the company’s decades-old culture.
But before we look at facts, let’s engage in a bit of fiction—let’s imagine Microsoft decides to fight Android on Google’s turf. In this alternate reality, Microsoft easily kills Android with one simple headline: “Windows Phone now free.”
The rest of the pitch writes itself. Compared to Google, Microsoft has much stronger connections to hardware OEMs on the one hand and software developers on the other. Its products are widely used and respected by business and consumer customers alike. By offering the Windows Phone platform for free, the company sacrifices licensing revenue, but this unnatural act is more than compensated for by the expansion of the Windows ecosystem. Windows PCs become more attractive, more compatible with the outpouring of mobile devices and applications created by enthusiastic hardware makers and eager app developers.
A bit breathless, I’ll concede, but you get the picture. We can visualize Steve Ballmer pacing the stage in an updated rendition of his sweaty “developers, developers, developers” oration.
Microsoft’s might and tentacular reach make the Free Windows Phone an unbeatable proposition. When Android is revealed in 2007 and the first HTC-made G1 phone is announced in Sept. 2008, Google can’t match Microsoft’s ecosystem. As a result, Android never achieves critical mass. Just as it dominates the personal computer industry, Microsoft climbs to the top of the smartphone world. This is an updated application of the company’s “embrace and extend” strategy, this time turning Google’s idea of a free OS against it.
None of this happened. Why not?
Back in the real world. Microsoft made a number of bad decisions that stem from its hardened culture.
To start with, Microsoft was hampered by its success. When smartphone trouble started, Microsoft was at the height of its power. As a retired Bill Gates postsciently said: Success is a terrible teacher. (Francophone readers will delight in a translation equivocation: le succès est une terrible maîtresse. Here maîtresse is both teacher and mistress, felicitously adding a dimension of narcissistic infatuation to the misleading data dangled by success.)
Less poetically, Microsoft knew it owned the magic formula. Look at our numbers!
(We’ll note that Nokia and RIM/Blackberry were similarly blinded by their success.)
For a long time, Microsoft’s orthodoxy placed the PC at the center of the world. When smartphones took center stage, the company’s propaganda censured talk of a post-PC world. Smartphones and tablets were mere “companion devices.”
While Microsoft treated the emerging mobile devices as a sideshow, Google and Apple forged ahead with modern operating systems that ran circles around Windows Mobile, itself a Windows CE descendant. It took Microsoft several hiccuping transitions hampered by backward compatibility trouble to move away from the outdated CE foundation. Windows Mobile became the modern Windows Phone in 2011 or 2012 (depending on whom you ask) but it was too late. Licensees didn’t line up at the Redmond door. The platform was already dying.
Then came a series of desperate moves.
We need licensees? Let’s impress the world with a big win.
Nokia, once the king of phones (they shipped as many as 100 million devices per quarter by the end of 2010), had recently removed its CEO, Olli-Pekka Kallasvuo (aka OPK). As luck would have it, OPK was succeeded by a former Microsoft executive, Stephen Elop. This made communication between the two companies much easier and quickly led to a Windows Phone licensing “win”…but the pretense was transparent: While Nokia paid a Windows Phone license fee, Microsoft balanced the transaction with “platform support” payments.
This may sound like “Windows Phone now free,” but it’s much worse in three ways.
- It admits defeat—Microsoft had to “buy” the Nokia licensing deal.
- It’s woefully late in the smartphone war—four years after the birth of the iPhone, three years after the first Android phone.
- Instead of enticing handset makers to sign a license because mighty Nokia proves the platform’s strength, would-be partners feel they can’t compete while paying for a Windows Phone license that is effectively free to a big competitor.
How could Microsoft execs have imagined that the barefaced Nokia “licensing agreement” would attract new takers?
But, wait, there’s more.
Shortly after the Nokia agreement is announced and smartly defended by Elop as a victorious battle in the war of platforms, disaster strikes. Nokia’s CEO in effect kills his existing product line by announcing a new line of Windows Phone devices… that will ship the following year. Customers get the message. Nokia’s current business of Symbian-based handsets immediately collapses and never recovers. In industry parlance, this is known as the Osborne effect.
Once again, what were execs thinking?
The Nokia situation becomes so bad that, in 2013, Microsoft is forced to buy the company rather than letting its one and only Windows Phone vector die. Stripping away the verbiage, Microsoft now has an Apple-like vertically integrated smartphone business. The company’s Lumia brand of smartphones offers respectable devices—I bought one—but they come too late in a world dominated by Android and iOS products.
In 2015 Microsoft writes off $7.6 billion as a consequence of the Nokia acquisition and lays off 7,800 employees, mostly in its phone business, the one that, today, has become “immaterial.”
We know who/what killed Windows Phone, and it’s not Android. We could point fingers at one or more Microsoft execs as the culprits, but that misses the point: Microsoft culture did it. Culture is dangerous; under our field of consciousness, it sneakily filters and shapes perceptions, it’s a system of permissions to emote, think, speak, and do.
In the abstract, the Windows Phone failure was easily preventable. But Microsoft culture made it unavoidable.
Now, let’s look around. Are there successful companies soon to be victims of their own culture?