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How Microsoft Got Smart About Phones

Bill Gates & Co. overcame years of technical missteps and an aversion to partnering with other big players -- just to become No. 2

April 04, 2004|Joseph Menn | Times Staff Writer

Over the years, many Microsoft Corp. competitors and customers -- along with more than a few government regulators -- have concluded that it is a relentless monolith bent on using its hold over PCs to seize control of everything from digital music to the massive computer systems that run the biggest businesses.

But as Microsoft's nearly decade-long quest to break into the rapidly emerging market for sophisticated wireless telephones shows, for all its determination and its $53-billion bankroll, the world's largest software company doesn't always win.

Despite spending more than $300 million in one of its largest research and development efforts and making unprecedented concessions on the look and feel of its software, Microsoft didn't see its first phones for surfing the Internet and retrieving e-mail hit the U.S. market until last fall.

It's too early to call the campaign a failure. Sales of so-called smart phones, now a small percentage of the 1.3 billion mobile phones in use, are growing quickly. Motorola Inc., which introduced the first phones with Microsoft software in the American market, says they will become the centerpiece of its strategy for selling to corporate accounts.

But the fragmentation of the phone industry, the fear among potential partners of being reduced to commodity providers like the PC makers and a backlash from Microsoft's own aggressive tactics have combined to frustrate the giant from Redmond, Wash.

The experience should offer solace to those in Microsoft's crosshairs, showing how ubiquity on PCs alone may not be enough to take the company as far as its executives and investors hope.

Like its gambits in video games and Web browsing, Microsoft's cellphone campaign began as a defense against competitors.

In the mid-1990s, then-Chief Executive Bill Gates had his first pangs of worry as he watched consumers snap up hand-held computers -- especially those made by rival Palm Inc. His response was to assign 300 Microsoft staffers to create a stripped-down version of the Windows PC operating system, which became the basis for the Pocket PCs produced by companies like Hewlett-Packard Co. and Dell Inc.

Gates also was looking ahead to when hand-helds would converge with mobile phones, transmitting data through the air as easily as the spoken word.

The obvious hardware partner was Nokia Corp. of Finland, the world leader in cellphones. But by 1998, Nokia and its competitors had seen too much of what Microsoft had done to the computer industry.

Microsoft earned fantastic profit margin by licensing its Windows and Office software for tasks like word processing and schedule management, which cost close to nothing to reproduce. With little choice but to carry the latest Microsoft products, companies that make PCs agreed to onerous terms that left them with almost no control over what their customers saw on their computer screens. Consumers had few means for distinguishing between computers from different manufacturers; as a result, PC makers competed mainly on price and watched their profits vanish.

Determined to avoid a similar fate, Nokia and fellow phone makers, including Ericsson and Motorola, formed Symbian Ltd., a venture to develop operating systems for smart phones. The Symbian software would be licensed at the same rate to all comers, who could modify it as they saw fit.

The move enraged Gates, who spoke with Nokia's chief executive on the heels of the Symbian announcement.

"I made it clear we were very disappointed and upset they didn't ever talk to us about a group of companies coming together like this," Gates wrote in a June 1998 e-mail to Microsoft executives that was later introduced in the Justice Department's landmark antitrust suit accusing the company of illegally bundling programs into Windows. "Symbian is bad for us no matter what."

Gates directed the company's Pocket PC division to work "hard core" on licensing deals with the smaller phone manufacturers, which he referred to as "the seven dwarfs."

Midcourse Correction

Before that could happen, Microsoft had to fix a fundamental problem with its technical approach. One of Nokia's objections to Microsoft's cellphone software was that it was basically the same as the Windows CE operating system that Microsoft created for hand-held computers.

That meant it had far too many features and was too complicated to use, industry executives said. It didn't feel as if it was designed for a person using only one hand, as most cellphones are.

At a showdown meeting in December 1998, a large faction of Microsoft's mobile devices team contended that the company should just add phone capability to its Pocket PC software, getting the product to market faster and satisfying a core audience of heavy data users.

Others said Microsoft should design a new cellphone operating system almost from scratch and aim to satisfy a broader segment of the population wanting voice calls first, plus a little Web surfing or e-mail.

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