Platform Payments, OEMs, And The Future Of Windows Phone Hardware

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Microsoft has a huge amount of cash and a small quantity of mobile market share. If current rumors hold water, the company may be looking to again use its oceans of currency to bolster its smartphone platform.

According to UnwiredView (reporting on notes from Eldar Murtazin), Microsoft may deploy billions in 2014 to a variety of OEMs, including Samsung and Sony, to undergird their support of Windows Phone. The idea squares with the noise we have been consistently hearing that Sony and others are prepping Windows Phone hardware for this calendar year.

Recall Microsoft’s payments to Nokia, in which Redmond sent more than $1 billion to Espoo. That money was actually a strong investment for the company, as Nokia’s Windows Phone hardware quickly became the best in the market. Nokia was so successful in the Windows Phone game that it drove everyone else out of the ring.

It’s long been my view that Nokia’s dominance in Windows Phone and the software tools that it applied to the platform were at least part of the pressure that led Microsoft to bid more than $7 billion for its hardware assets. But for now it’s enough to say that there is firm and recent historical precedent for such a move by Microsoft.

The Third-Party Dance

When Microsoft purchased Nokia’s hardware business, it was simple to presume that it would focus on first-party construction of Windows Phone hardware and let third-party work wither. Microsoft said that wasn’t the case. I wondered if they were saying that with a wink.

If the company does intend to directly bankroll the creation of Windows Phone handsets by other companies, Microsoft most assuredly wasn’t winking, and I was far too cynical. Why in Sam Hill would Microsoft bankroll competition to the asset it just spent billions picking up? Good question.

The move makes sense if Microsoft is working to expand the total sum of sold Windows Phone handsets, regardless of who makes them. While Microsoft wants to sell Lumia handsets in increasing quantity, it would prefer to sell those same handsets alongside a bloc of devices from partners.

Microsoft will sell more Windows Phone handsets long-term if partners also sell in the short-term, driving near-term unit volume and thus attracting more developer attention. So while Microsoft could, perhaps, retard unit volume growth of its first-party hardware by paying to have more intra-platform competition, the longer term here is more valuable than short-run revenue.

Services

Considering Windows Phone as a mere hardware project, as we have been doing, is too narrow. Just as Windows 8.x is a conduit for Microsoft services, so too is Windows Phone a mobile conduit for Microsoft services. In that context, Windows Phone becomes the tip of Microsoft’s “devices and services” spear.

The wrinkle to the above is that Microsoft is widely expected to unite its Windows RT and Windows Phone platforms. This actually makes the hardware question simpler: Microsoft builds Surface hardware and works with OEMs. So, doing the same thing with Windows Phone when we regard that platform as soon-to-be Windows Lite is hardly surprising.

I don’t think that it’s a stretch to state that Bing does better on Windows 8.x than it does on Windows 7. That holds for Windows Phone, across services.

So the other side to Microsoft funding hardware competition is that it is, at the same time, buying market share for its services in the mobile world. And that is almost certainly worth more to it than short-term hardware revenues.

Sums

The rumored sums total in the billions, with most OEMs listed picking up nine-figure amounts. That’s enough money for development and marketing I’d presume. 

What’s fun is Microsoft can likely use foreign cash reserves for the payments, so the cost to the company is less than it otherwise appears. Microsoft will likely earn back some of the dollars in per-device payments.

With tens of billions of dollars currently sitting overseas earning less interest than the rate of inflation, Microsoft deploying some of it to OEMs that could bolster its device volume in their native markets is a pretty simple decision.

Windows Phone is too small. Its market share remains below the level required for it to attract the developer support that it needs. The number I hear more than any other is 10 percent global market share. Microsoft likely can’t get there on its own — even with owning the Lumia line inside the next three years. That’s too late. So it needs help. And when you need to, buying friends is a quick strategy to having a posse.

Microsoft declined to comment on this post.

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