Microsoft Needs Mobile Money

Google has taken a different road to mobile profits, but one that seems to be working for them. Some analysts have said that Google stands to make $10 per user of the Android platform. If that is truly the case, it is not bad considering that Google is not a hardware maker, doesn't have carrier kickbacks to lean on, and has no "walled garden" to prevent Android users from using other sources of apps.

What Google does have, however, is volume. The Android platform has by some measures passed the iPhone in installed base. Android users reportedly aren't as likely to pay for apps as iPhone users, which limits Google's profits from the Android Market. But the most capable apps on the platform are Google's own apps, and those often include Google's own advertising. Since Google's AdWords is the largest ad market for desktop advertising, they are successfully using that network to leverage mobile profits. Google can afford to give away Android in order to make money off ads.

That brings us to Microsoft.

With a few exceptions like XBox and Zune, Microsoft has made its money from licensing fees on its software. With Apple providing its own OS for iPhone and Google giving away Android for free to any phone maker who wants it, this is a tough model to sell to OEMs. It actually made some sense for Nokia, which was investing large amounts of money in its own software, to switch to Windows Phone. That decision was made easier when Microsoft reportedly offered a $1 billion financial package to Nokia. Yet those are profits headed in the wrong direction, at least in the long term. Microsoft either needs to convince its OEMs to license Windows Phone or find some other revenue source.

Apple got the benefit of being first with a truly innovative smartphone design, and locked in AT&T as an exclusive partner to increase profits. Since there are plenty of mobile players already in the market, Microsoft doesn't have that same ability to lock into a single carrier. The size of the iPhone and Android markets make Windows Phone a comparatively tiny player; Microsoft's mobile market share in the fourth quarter of 2010 actually shrank, despite the introduction of Windows Phone 7.

The small size of the Windows Phone ecosystem presents serious challenges to profitability. Since the OEMs make the actual hardware, they are going to be the ones to benefit from innovative hardware or accessories and Microsoft won't share in that. Apple is squeezing its App Store developers hard for money, but Microsoft is unlikely to be able to do the same. Instead, they will need to make the Windows Phone platform as welcoming and profitable as possible, despite its small size. Finally, Microsoft doesn't have a large ad network like Google; there isn't a way to leverage an existing advertiser audience for mobile applications.

Microsoft might be tempted to narrow its focus with Windows Phone and try to address just the corporate market, since that's where Windows Mobile 6.5 had its strength. If it was five years ago I think that strategy might work, but even the corporate mobile market leaders like RIM have decided to go broad with their newer product offerings. There isn't a well-defined line between consumer and corporate in the mobile market anymore.

It's time for Microsoft to drop the conservative approach and try an all-out attack on the mobile market. The Nokia deal shows they are willing to try. Now the company needs to create demand for Windows Phone. Letting its employees write Windows Phone apps and keep the money from spare-time Windows Phone projects is another aggressive move. Perhaps it will create some unique apps that aren't available on iPhone or Android, and that could get consumers to switch.

If Microsoft wants to have a functional Windows Phone ecosystem, they pretty much have to have an app store and ad network. For now they have to give just about everything away (and even pay companies like Nokia to join the party) in order to build a non-trivial market share. If they're lucky they can charge real money for Windows Phone licenses at some point, but it's going to be a long haul.

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