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As Microsoft Goes Mobile... Will Innovation Follow?

As Microsoft Goes Mobile... Will Innovation Follow?

"Empowering people through great software ­ anytime, anyplace, and on any device" is Microsoft's vision. Literally. Long accused of using its dominant position in the desktop software market to repel innovative competitors, some are wary of Microsoft's ventures in the mobile industry ­ perhaps suggesting that the company's true vision is to be "everywhere on every device." To the contrary, Microsoft's newest mobility platforms are going to kick-start a new era of risk-taking and innovation among product design partners, customers, and competitors. Surprised?

Inspiration. Innovation. They're just words. Words that probably have a literal translation in every language ever written or spoken. In the business world they represent the roots of technological progress.

While you may be unable, by force of will alone, to create an environment where inspiration commonly occurs, there are many who would have you believe that innovation is something that can be nurtured, driven, incubated, or simply funded. Frequently you hear of innovation being "spurred" by some all-knowing entity, with promises of great, progressive leaps forward. I suppose it's not unlike the concept of a horse being spurred to move forward by a sharp, metallic kick in the ribs ­ though you could hardly say that this method is inspirational.

These days, the methods used to spur innovation are debated as often in courtrooms and government agencies as they are in the halls of academia and at research institutions. Interestingly enough, you rarely hear people talk about the ways in which to spur trash collection or recycling. Or to spur peace throughout the world. Whenever I hear the two words "spur innovation" in combination, I automatically look for an undercurrent of motive or bias. Usually, those who seek to spur innovation fall into two groups: organizations that are raising money to fund an educational initiative or economic development program; and organizations that have lobbied to break up or otherwise punish Microsoft.

Some of the anti-Microsoft rhetoric in recent years has been built up by the company's competitors, who hope that government sanctions might lead to increased sales of their own products. More power to them. Personally, I always tuned out these monopoly games whenever the innovation card was played. I never bought into the idea that we'd have innovation "spurring all over the place" if not for the presence of Redmond's Goliath. And the press is guilty of bias on occasion. Ever notice how Microsoft never seems to "enter" a market in a news story? They are commonly described as "assaulting" or "attacking" a new industry, or trying to "capture" market share or "fortify" their positions. Look out below!

A decade ago, Microsoft bashers commonly decried the company's lack of innovative products and reliance on marketing muscle. These days, the company is accused of leading a brain drain from the academic community and buying the best talent to stock its Microsoft Research division. Bill Gates announced just weeks ago that the company would increase their research and development spending to $5.2 billion for fiscal 2003, a 20% increase.

In the wireless industry, there are some who question whether traditional handset and base station vendors have, themselves, suppressed innovation by exploiting their relationships with the mobile operators. Won't it be ironic if Microsoft's new initiatives in the mobility sector actually challenge established vendors and startups, leading to more compelling wireless data offerings and increased competition?

"This is the year that integrated, wireless Windows-powered devices, including the Pocket PC Phone Edition and the Microsoft Smartphone 2002, will come to market," says Juha Christensen, corporate VP of the mobility group, "and we hope they will be a catalyst for the wireless data economy."

Microsoft's stepped-up presence will only add to the intrigue, drama, and cutthroat competition we're seeing in the mobile sector. Thrills, spills, and chills. J2ME, Openwave's Services OS, Symbian, MMS, Smartphone, BREW, Wireless Village, FOMA, and much, much more. Stay tuned. This show is going to have it all.

Windows of Opportunity
Earlier this year, I had the chance to sit down with Mike Wehrs, director of technology and standards for Microsoft's mobility group. I was particularly interested to hear about the company's rules of engagement for strategic investments in startup companies at the time. You hear about them pumping money into Korea Telecom, Telecom New Zealand, or investing in various cable operations around the globe. And in their heavily-hyped 1998 joint venture with QUALCOMM, they created mobile solutions provider WirelessKnowledge (which they've since divested). Yet, they don't seem to fund startup companies at the rate of their large corporate peers, like Cisco and Intel. Instead, they want to encourage the brightest ideas to spring forth from their developer communities and from those that build devices around the Smartphone and CE platforms.

Once seen as standoffish and disconnected from the venture capital community, they now host a summit with VCs in Silicon Valley each summer to encourage entrepreneurial visions based on Microsoft platforms. Similarly, they created the Microsoft Research Faculty Summit three years ago to foster a spirit of collaboration between industry and academia, and to evangelize their own research and product development.

"We generally are not a very early stage investor ourselves," he told me. "The technology areas that we fund are deeper technology plays. Microsoft really needs very big markets in order to justify doing something. Wall Street just expects much, much bigger things from us."

Connecting people to data represents a sizable market, for sure. "We understand data, we understand network integration. We understand all of the things that you need in the supply channel to make it possible, so from a mobile device perspective, we see this as a huge growth opportunity."

Wehrs left Microsoft for a short time and served as a principal at Ignition, the much-heralded Bellevue, WA, venture capital firm that was founded in 2000 by former Microsoft and McCaw executives. The firm, headed by Windows ringleader and former Microsoft executive committee member Brad Silverberg, has one of the most progressive wireless portfolios around including Airwave Wireless, RadioFrame, Seven, Wildseed, and Avagadro (which was recently acquired by Openwave).

Now back at Microsoft, Wehrs can lend new perspectives to its mobile business strategy. "How investments are characterized is an important distinction," he said. "If Microsoft invests money up-front to assist in the development of a business with another companyŠ that's one way to invest. You have pure equity investments as well, but on the other end of the spectrum, there are massive comarketing capabilities."

They truly believe that the comarketing angle will play a key role in facilitating new product adoption, and that their .NET Compact Framework will pave the way for an army of ISVs (independent software developers), making it easier for PC software developers to become mobile phone application developers. PeopleSoft recently visited one of Microsoft's Redmond, WA, labs and ported an application from a PC to a Smartphone in just two days.

Microsoft's recently announced Mobile2Market program was developed to enhance the delivery of certified mobile applications and create new revenue opportunities for companies supporting Windows-powered mobile devices. As we move from an embedded model to a world where ISVs freely contribute to the development of applications for operators, we should see more compelling "killer apps" mature than at any point in the past. New applications drive sales of new handsets and even inspire subscribers to switch carriers. It's already happening with J2ME and BREW, and with i-mode and J-Phone. And the list goes on. The arrival of Windows-powered developers in the mobile marketplace will only add to the "wow factor" once their most inspired applications catch on.

In the long run, Microsoft's investment of its resources may be a greater benefit than a simple venture capital placement. "Where it has shared risk up front on the development," Wehrs explained, "Microsoft would participate in a much heavier way than normal in bringing that product to market."

You can expect to see the results of some of these projects as new mobile devices are launched. For example, the company took an equity stake in Birmingham, UK-based Sendo in 2001 only after working on what would become the Z100 Smartphone (based on Microsoft's Smartphone 2002 platform; code-named "Stinger" at the time). Later this year Cingular plans to launch Sendo's GSM/GPRS handsets, starting with the Z100 in its GSM 1900 markets. AT&T Wireless will follow up with Smartphone products by this time next year, and Hong Kong's CSL Limited is expected to be the first Asian operator to roll out the Z100.

Wireless operators like mmO2, which was spun-off from British Telecom in 2001 (and includes the properties of BT Cellnet in the United Kingdom, Viag Interkom in Germany, Telfort in the Netherlands, and Digifone in Ireland) also benefit from Microsoft support. Their custom device running Pocket PC Phone Edition, branded the "xda", has seen strong uptake since its launch in May. O2 also plans to resell the product through CSL in Hong Kong and StarHub in Singapore. Billed as the ultimate lifestyle device for people on the move, it's a user-friendly phone, a Pocket PC, an entertainment device, and a personal organizer. "It's everything that a Pocket PC is, plus GSM and GPRS functionality built in," according to Wehrs. "And not just built in, but fully integrated."

He also speaks of the "ethnographics and usability" studies that have been done at great expense leading up to these launches. The payoff is that new devices are very intuitive to the user. Notepads pop up during phone calls. Windows Media Player mutes when a call comes in. You can work on a Word document while using the speakerphone. "Smart dial" features allow users to easily pull phone numbers from Outlook data. "Very simple stuff really," he says, "but in the way that you would expect it."

VoiceStream's T-Mobile-branded Pocket PC Phone Edition is the first phone edition currently shipping in the U.S. We'll see it in Europe from Orange, T-Mobile, and Vodafone. This prompts an interesting twist. Microsoft's efforts in the wireless space are contributing to an environment where the operator increasingly becomes the "brand" on handsets and mobile gadgets.

It's not just household names like Samsung that will leverage these new device categories. Companies like HTC have embraced both the Smartphone 2002 and Pocket PC Phone Edition visions. But as Wehrs says of HTC, the Taiwanese OEM is "not a brand that you'll ever know."

Though they are well thought of by industry insiders as the manufacturer of the iPaq and the producer of the xda, you won't see their logo. Instead, you'll see the operator's name or logo. It will be an O2 device or a T-Mobile device in the minds of customers. TCL Mobile of Huizhou, China, and Compal Communications of Taiwan are also on board with Microsoft to develop new devices. How soon will it be before we see carrier-branded headsets without vendor logos?

Conspiracy theorists might suspect that these developments will weaken the brands of the traditional handset and PDA vendors. Possibly. Though they may indirectly lead to more innovative products from the likes of Nokia, Sony Ericsson, and Motorola, who will have to find newer ways of maintaining mindshare with consumers.

"It is a change for the carrier," says Wehrs. "All of a sudden, they've stepped outside that cozy marriage with the handset vendor. That's a fundamental, dynamic shift that we're very, very focused on. The market is actually shifting from the vertically integrated manufacturer to horizontally integrated manufacturing.

"That's a precursor to a whole change in distribution strategy. It's in every other market you look at. It's just macroeconomics. Once you start seeing that price pressure driving companies to outsource individual pieces, you enable this OEM manufacturing model. And when that happens, the price gets driven to a point where you can get vertically targeted solutions. That change in distribution model is going to be a real maturing point for the mobile industry."

Innovate or Die
This tired slogan has been tossed around so often by technology companies that some may actually believe innovation is synonymous with a new product launch. As stock valuations soared, and then plummeted, you have to wonder how many corporate leaders attempted to implement strategies that would spur groundbreaking development among partners, customers, and their own employees.

Microsoft has. Christensen, who was a co-founder of Symbian before moving to Microsoft, compares the company's mobility group to a startup attached to a legacy organization. As mobile operators manage the landscape left behind by the economic downturn, traditional mobile vendors and developers are rightfully concerned about falling sales and market share. Microsoft's presence, with the perception of unfair advantage that accompanies it everywhere, may make others even more aware of their own mortality. True innovation could be the result.

SIDEBAR:
Microsoft Teams with AT&T wireless in Push to Take Mobile enterprise Lead
It's apparent now that the wireless industry is the business equivalent of thoroughbred horse racing. The sport of kings. It's full of mad scientist breeders trying to mate a series of disparate traits in order to produce a champion. You've got a handful of well-heeled players from around the world, what amounts to high stakes gambling, and a cordial yet cutthroat attitude toward competition. It's about two minutes until post time in the Mobile Data Derby and the bets are still pouring in. The horses are on the track. It's just not so easy to tell which are headed to the winner's circle and which are destined for the glue factory.

Those who are handicapping the race will find it harder to ignore the state of Washington in the months and years to come. The July 31 press conference announcing the wireless data alliance formed by Redmond neighbors AT&T Wireless and Microsoft came just one day before the official announcement that Bellevue, WA-based T-Mobile USA (VoiceStream) was rolling out the first U.S. device to use Microsoft's Pocket PC Phone Edition software. A similar version from AT&T Wireless is scheduled to hit the market before the end of the year.

Microsoft CEO Steve Ballmer said the alliance had been six months in the making and was code named Project 520 after the freeway that links Microsoft and AT&T Wireless in Redmond. While no financial details were released, the new partnership will result in a series of solutions aimed at enterprise users ­ simplifying their access to information residing behind corporate firewalls and integrating location-based services built upon the MapPoint .NET platform. "Not only will mobile workers and their companies benefit from this alliance," Ballmer said, "but developers will quickly discover that smart devices, high-speed wireless networks, and .NET technologies are powerful building blocks for future innovation."

"Business customers want continuous connectivity in a secure and manageable environment," added John Zeglis, chairman and CEO of AT&T Wireless. "By teaming with a world leader in business software solutions, AT&T Wireless will provide a simple Œout-of-the-box' mobile experience that can be easily installed, managed, and maintained by corporate IT organizations."

Product development is reportedly in the "late stages" and enterprise customer trials are already underway. The two companies have been building a centralized provisioning and activation process for the three classes of GSM-enabled wireless devices that will benefit from the joint development: Smartphones, laptops, and Phone Edition PDAs. New equipment will arrive preloaded, which will eliminate the need for IT personnel to manually install applications on each device.

In a follow-up conversation, product manager Ed Suwanjindar, of Microsoft's mobility group, said that both companies would be able to "extend the reach of their products and services to new customer sets" as a result of the alliance. AT&T Wireless serves nearly 70% of Fortune 500 companies, and as it continues to launch new markets for GPRS, the pool of potential beneficiaries should grow.

So, was this just another in a series of strategic PR moves for Microsoft, lending additional credibility and validation to its mobile strategy? Or does the relationship have staying power? Zeglis made a point of saying, "This thing is real," during the announcement, as if to head off any skepticism. "We have joint working groups focused solely on developing these new wireless data solutions," he continued.

In the weeks leading up to the announcement, Suwanjindar and others at Microsoft had to dismiss rumors that they had already struck agreements with all of the major operators in Europe and the United States for support of the new Windows-powered devices. This is not true as of yet.

A Boost for the Mobile Data Market?
Sarah Kim, a Yankee Group analyst, says that the announcement is good for the industry in the short term and that it should "create some additional momentum" for both companies. Though the partnership is aimed at supporting the corporate user, "they really don't make clear what the strategy is for the mass market" she says of Microsoft. "There's no way the market is going to move to $500 phones overnight."

Kim notes that we have yet to learn how Pocket PC Phone Edition and Smartphone devices might migrate from the high-end device world to the general consumer space; from a (unit sales) market measured in millions to a market of hundreds of millions.

The partnership will yield a new set of productivity options for business users. "The enterprise is not interested in a lockup of one network with one software supplier," says Dr. Gerry Purdy of Mobile Insights. "Rather, they want to know who's going to help them wirelessly enable their mobile workers running on Palm, Pocket PC, and other platforms" which operate over a number of different networks.

What really inhibits the industry now "is a lack of open standards," says Jane Zweig, CEO of the Shosteck Group, "Microsoft is now one player among many." She notes that their participation in the Open Mobile Alliance, among more than 200 other companies ­ each with their own vested interests ­ may be more significant in the years to come than any single announcement.

"Microsoft's role," says Purdy, "is to support standards, provide a great OS and core apps, and then let the licensees and third-party software companies provide really great total solutions."

From the AT&T Wireless perspective, they are clearly hedging their bets. Microsoft has officially joined the players' club, and their mobile data solutions will be available in the market and evaluated on their own merits. Since the Microsoft relationship is non-exclusive, AT&T Wireless will offer their customers the best solutions from Nokia, Motorola, and others alongside the Microsoft-enabled products.

Microsoft hasn't been the front-runner in the mobile data race, but they now seem intent on moving to the head of the pack. From the top down, the company has made the mobility market a primary focus that ties into their .NET strategy and R&D efforts. They've fired up their developer community and stoked new levels of anticipation for smart devices among early adopters. The company's critics will continue to question what Microsoft knows about wireless, but as mobile data moves into the corporate mainstream, they may need to question what the other players know about software.

More Stories By Tim Bresien

Tim Bresien is WBT's VC editor, the principal consultant with infraStar, Inc., and a freelance writer covering investments in the wireless communications sector. He is a former research analyst with the telecommunications consulting firm of Bond & Pecaro, Inc., Washington, DC, and a cofounder of the Telecom Investor Forum, held annually at SUPERCOMM.

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