What's the biggest difference between Microsoft's newest mobile operating system and the Google version that it will be competing against (eventually)?
Microsoft will charge carriers for its OS, while Google is giving Android away for free. (The other big competitors, Apple and RIM, don't license their operating systems to third parties.)
That's just silly. Microsoft is dead in the water in this business. If it wants to get moving again, it needs to do everything it can to help itself. And in mobile software, that means competing with "free" with "free."
Yes, giving a product away for free that Microsoft used to charge for will undermine Microsoft's business model. But that's eroding anyway. And, again, to come from behind in this business, Microsoft needs all the help it can get.
The good news is that Microsoft is so big that its new Windows Phone operating system has almost no chance of making enough money to move the needle anyway. So it might as well join rival Google in giving it away for free, in an effort to drive up device sales and market share.
During Monday's keynote, Microsoft CEO Steve Ballmer announced that Microsoft would stick with its current Windows Mobile business model. That is, Microsoft would let handset makers license Windows Phone 7 Series in exchange for a fee.
"I think there's something clean and simple and easy to understand about our model," Ballmer said. "We build something, we sell that thing." He added, "I think it's not only in our best interests, but it's ... a simple model that's easy for developers, handset manufacturers, and our operator partners to deal with, to understand, and to build from."
Maybe so. But the problem is that the amount Microsoft can charge for a smartphone OS license is very low, and probably getting lower.
And even if the smartphone market grows significantly in the next few years, and even if Microsoft can capture a respectable share of the market, it stands to make a very small amount of money selling Windows Phone 7 software.
Not enough to represent a real growth driver for giant Microsoft. And therefore, not enough to justify charging a license fee — which is surely a deterrent when handset makers like LG, Samsung, HTC, Sony Ericsson, Motorola, and others choose which OS platforms to base their phones on.
To estimate what Microsoft's mobile OS license revenues might look like, we ran the numbers with a variety of license fees, ranging from $5 (if Google's strategy pushed Microsoft's pricing down even lower) to $20 (if an intoxicated gadget maker fell so in love with Windows 7 that it would pay through the nose for it).
• A Microsoft rep wouldn't tell us how much Microsoft's hardware partners pay it to license Windows mobile software, but in the past, it ranged from about $8 to $15 per phone, according to research firm Strategy Analytics.
• We also estimated that the smartphone market would grow to around 250 million devices worldwide in 2011, the first full year that Microsoft's new OS would be on the market, and that it might capture 5% to 15% of the market that first year, or roughly 12.5 million (conservative) to 37.5 million units (aggressive). The smartphone market was about 175 million units in 2009, according to IDC.
The results: Microsoft's mobile revenue from license fees could be as low as $63 million, or as high as $750 million, across all those assumptions.
But a reasonable average is somewhere in the $300 million range, which is less than 0.5% of the $66 billion in revenue that Wall Street expects Microsoft to generate in fiscal 2011.
This suggests that mobile license fees will NOT be a significant growth story for Microsoft any time soon, and that unless our estimates are radically low, charging is a waste of time.
Instead, Microsoft should give Windows Phone software away for free, with the hope that manufacturers will use it to make more Windows phones than they're previously planning to make, that they'll charge lower wholesale prices for them, and that carriers will charge lower retail prices for those phones. That could drive up Microsoft's market share, with little negative effect on Microsoft's financial situation.
So how will Microsoft make money off Windows phones? Beats us. But it has to be a way other than license fees.
The options range from taking a cut from selling mobile applications, to subscription fees for Xbox live and Zune music accounts, to mobile search and display advertising, via Bing and potential ad network acquisitions. Sure, those revenue streams will be minuscule to begin with, too. But they will grow with time, and with a bigger user base, which the no-license-fee phone business should provide.
Or Microsoft could take the route that Apple, Research In Motion, Nokia, Palm, and others take, which is selling their own hardware and software. That can be tricky, but it can also be very lucrative: Apple generated more than $15 billion selling iPhones in 2009.