If Steve Ballmer had taken my advice four years ago, would he be better off today?
I actually like this deal. As Apple and Samsung have proven in recent years, one way to a profit in the smartphone industry is to sell expensive hardware at significant scale, which operators subsidize to reasonable retail prices. That’s not necessarily going to work forever, or even for long, or especially for everyone, but it can work today. For Microsoft, it’s worth trying.
Until now, Microsoft didn’t have anything like this at all — just a lousy mobile-OS licensing business, a patent strong-arm over the Android world, and some services revenue. But nothing that moves the needle.
Now, Microsoft has a credible business model for mobile — producing and selling high-end smartphones. (Not to mention its likely CEO-in-waiting, Stephen Elop.) As always, execution is everything, and Microsoft’s mobile history suggests it could easily screw this up. But there is at least an opportunity for bigger success that didn’t really exist last week.
This reminds me of a series of articles I wrote starting in 2009 urging Microsoft to buy BlackBerry, or Research in Motion, as it was then known. Why? For essentially the same reason: To give itself a real possibility at making money in mobile.
RIM, for instance, gets several hundred dollars in revenue for each BlackBerry sold, plus BlackBerry email/Web service fees. Microsoft, on the other hand, has stuck itself with a lousy business selling Windows Mobile operating system licenses for $8 to $15 per phone, according to research firm Strategy Analytics.
So while analysts expect RIM to top $14 billion in revenue next fiscal year, Microsoft will be lucky to reach $400 million in Windows Mobile revenue (30 million Windows Mobile licenses at an average $12 a pop). That’s couch change for Microsoft, whose revenues should top $60 billion this year.
Since 2009, of course, BlackBerry has imploded. Its longtime co-CEOs were forced out, its tablet bombed, and its market share and profitability have declined significantly. The future looks bad, too.
The main problem: It was never able to create a mobile platform that could compete with iOS, Android, or even Microsoft’s Windows Phone. For example, here are John Gruber’s brief thoughts on the recent BlackBerry Z10: “Pretty nice” hardware, “disaster” software.
This is exactly why a Microsoft-BlackBerry tie-up in 2009 could have been good! Just as Microsoft was starting to put together a really solid software platform in Windows Phone 7, BlackBerry needed a grownup OS. Plus the obvious overlap in enterprise, RIM’s worldwide distribution, and even a budding mobile social network in BBM. There’s a possibility that it could have been a good combination.
The price, especially relative to the Nokia deal, would have been high. As I wrote at the time, “With RIM’s market cap down to around $21 billion, Microsoft might be able to get the deal done for $35 billion.” Today, BlackBerry is worth $5 billion — most of its value has disappeared. But Apple has also generated more than $200 billion in iPhone revenue since then — and huge profits. This is an industry where you need to go big.
It is, of course, actually impossible to know whether a Microsoft-BlackBerry tie-up would have been better or worse than where we’ve landed. Given the characters and track records involved, it could have easily been a disaster. But this is also the most important transformation in the history of computing, and the biggest software company in the world has missed the boat so far. Buying BlackBerry four years ago and executing well could have been better.
Now for the charts. We all know about Google’s amazing Android rise over the past few years, but do you remember back to 2006 when Microsoft led the U.S. smartphone scene? (Stats by comScore.)
The market wasn’t nearly as big back then — see the second chart of actual subscriber numbers, showing what happens when you top out early — and it was soon dominated by BlackBerry, which also didn’t last. And it’s worth noting that whatever lead Microsoft had wasn’t because people were in love with Windows Mobile — it was just the least-bad option for companies like HTC, Motorola, Samsung, and even Palm. The story here isn’t that Microsoft didn’t see the mobile revolution coming. It just peaked way too early, and wasn’t prepared when Apple showed up with something a lot better.
The Nokia deal doesn’t solve this problem quickly, but again, it at least puts Microsoft into a position where bigger and better things could happen.