Microsoft's Windows Phone Strategy for 2012

As I write this, the 2012 Consumer Electronics Show is cranking up the hype machine, using Las Vegas and more than 140,000 attendees as the backdrop for announcing thousands of products from numerous companies. Although many of these products won't ship until much later in 2012, some are due in the first half of the year, including a new generation of Ultrabook PCs, some Ultra-Definition TVs, and more tablets and smartphones than anyone can accurately count. But what I have my eye on is Windows Phone: I know that Microsoft and its partners are betting big, literally, on Windows Phone this year. And this week I'd like to discuss those plans -- including why they're so important to the health and well-being of the software giant going forward.

Although technically excellent, Windows Phone hasn't gotten off to a good start. Depending on the market and the researchers you listen to, it accounts for somewhere between 1.5 and 5 percent of the smartphone market. That means it's used a bit more than webOS and quite a bit less than "other," if you catch my drift. More important, it's still a far cry from the current number-three platform, RIM's BlackBerry, and that's a sinking ship with no hope in sight.

Pundits, analysts, and even Microsoft itself have theories about why Windows Phone hasn't taken off yet. Its Windows Phone Marketplace app store has grown amazingly fast, faster even than did Android -- but with just over 50,000 apps to its credit, that's less than one tenth the size of the leading app stores from Apple and Google. Its software isn't updated as frequently as is Apple's, and its hardware isn't refreshed anything near where Android is. And Windows Phone to partners isn't free, so it hasn't been adopted by as many hardware makers as has Android, which is free. It never will be.

There might be other reasons. In a recent blog post, former Microsoftie (and, full disclosure, a guy I consider a friend) Charlie Kindel revealed what I think to be the single biggest issue that's harmed Windows Phone: which is that by doing the right thing for consumers with this release (i.e., by preventing hardware makers and wireless carriers from modifying the Windows Phone hardware or software beyond its tightly-controlled specifications), Microsoft has, in fact, done the wrong thing for its partners. Ironic, sure. But you know it's true. (I wrote a lot more about this in a recent blog post called "Kindel: Yes, Windows Phone Is Superior, But Here's Why It's Not Selling.")

But there's more. Kindel also highlighted a second issue that is likely just as serious: Unlike with other devices, Microsoft and its partners have never tried to market Windows Phone handsets to the people who sell them. They've never provided sales incentives to the retail personnel that actually handle new phone requests from customers. And the competition has been doing just that all along.

That's about to change. According to internal Microsoft documentation that I first viewed in mid-December, Microsoft and its hardware maker partners -- Nokia, Samsung, and HTC -- are going to invest in Windows Phone fairly dramatically in the coming months. I'm talking almost $200 million in the United States in the first half of 2012 alone. And Microsoft and Nokia will spend $130 million marketing just a single Windows Phone -- the Lumia 900 ("ACE") -- on just AT&T, just in the first half of 2012. Samsung and HTC are both contributing tens of millions of dollars as well, just for the first half of 2012, just in the US. The worldwide marketing effort for Windows Phone must be much, much more.

A good portion of this money will be heading toward so-called "below the line" marketing efforts, which are those efforts aimed directly at retail sales professionals, or RSPs. (This is in contrast to "above the line" marketing efforts, which is the marketing we all see as the public: TV and web ads, billboards, and so on.) And since first discussing this move, I've heard from dozens of retail reps from a variety of wireless carriers. And they've all told me the same thing: This practice isn't just common, it's simply the way business is done. And that Microsoft's (and its partners') incentives are so good, that they're going to, in the colorful words of one rep, "sell the crap out of Windows Phone this year."

Exciting, eh? But it's only the tip of the iceberg.

There's a lot more going on with Windows Phone, and how this platform evolves will dramatically affect its future as well. There are software updates to be had, for example, and with the Windows Phone family getting bigger and more diverse, Microsoft will no longer be providing any guidance about these updates. Nor will it be providing all updates to all users, since many will be targeted at specific markets and/or devices. ( For more information about that particular issue, see "Microsoft: Relax, Windows Phone Software Update Policies Haven't Changed.")

There should be two major sets of Windows Phone updates coming in 2012. (The addition of LTE-capable phones on AT&T in the first half of 2012 won't require an update because, surprise, surprise, the current version of the software secretly already supported this.) The first is an update, or set of updates, code-named Tango, that's targeting only new devices that will be sold in emerging markets. And this partially explains Microsoft's recent recalcitrance about guidance: If you thought the NoDo situation was bad last year, imagine the whining we'd see if US-based Windows Phone users never got a particular update.

The second update is code-named Apollo. It's due in Q4 2012 and is steeped in mystery, most of which involves whether this release will be based on Windows 8 (the PC OS), as rumors and some of my sources suggest, or is just another evolution of the existing code base. There are pluses and minuses to both approaches, and it's not really worth debating here since I don't really know what they're doing . . . yet.

Maybe Microsoft will reveal more this week at CES. But by mid-afternoon on Monday, Microsoft CEO Steve Ballmer had offered a tantalizing clue that went no further toward solving the mystery. At an AT&T press conference, he said that Windows Phone already "shared" some technologies with the forthcoming Windows 8 and that this sharing would only get stronger over time. But he didn't actually say that that Windows Phone 8 would be based on Windows 8, as widely rumored.

Either way, it's very clear that this tie-in -- whether it's just through shared experiences like the Metro-style UI with its live tiles or a deep, architectural change that literally binds Windows 8 with Windows Phone -- is also key to the future success of this platform. People are going to see Windows 8-based PCs, Ultrabooks, and tablets in stores less than a year from now, and they're going to want them. And when they find out they can get a phone that looks just like that, well, they're going to want that too.

The big question is whether all of this stuff, together, is enough. And on that note, I can't say. But I can say that the success of Windows Phone is central to Microsoft's efforts to migrate from its stuffy, legacy past to its cloud-enabled, highly mobile, and highly connected future. Microsoft needs to control a successful platform at the heart of each core computing market, and this will grow to include not only traditional PCs and servers but also smartphones, tablets, and of course cloud computing services. And the mobile piece is particularly important, because Apple has shown the world that people don't need a big, complex PC to get things done, and Android has taken that concept and run with it with a family of devices that's doing even better. And that's undercutting Microsoft's other core product lines, such as Windows.

Today, Windows Phone is the black sheep of the mobile world. It deserves better, I think, and it will almost certainly one day surpass RIM's BlackBerry to become the number-three platform behind Android and iOS. And some believe it will do even better than that. But if any of that happens, the seeds of this future success are all tied up in Microsoft's (and its partners') plans for this coming year. And it all starts right now.
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