Why Microsoft won't make an iPhone rival

Rather than creating a premium device to rival Apple and Samsung in the developed world, Microsoft plans to rely on partners to mine emerging markets with budget smartphones.

Nokia's Lumia 520, a smartphone running Windows Phone that's aimed at price-sensitive consumers. Microsoft

Microsoft Chief Executive Steve Ballmer has spent plenty of time in the last few months telling the world that Microsoft was morphing from a software company to one that focuses on devices and services .

Turns out, there's one device that Microsoft has no plans to make anytime soon: a smartphone.

At the Dive into Mobile conference yesterday, Terry Myerson, the vice president in charge of Windows Phone, Microsoft's also-ran of a mobile phone operating system, said that Microsoft would only jump into the business of making a smartphone if its partners, such as Nokia, weren't offering compelling devices .

"But we don't see that happening," Myerson said. "So we don't see a need [for Microsoft to build its own device]."

There is, of course, more to it than that. Microsoft recognizes that the cost of creating a premium handset to compete at the high-end of the smartphone market against Apple's iPhone and the Samsung Galaxy S3 is an enormously expensive and risky proposition.

"Making that 'hero' smartphone isn't necessarily the best use of Microsoft's resources and time," said IDC analyst Kevin Restivo. "The race (in the smartphone market) is to the bottom."

So instead, the company is looking to gain ground in emerging markets. In those markets, the smartphone business is particularly price sensitive.

A discount handset, though, isn't the kind of product that Microsoft wants to make. Any device made by Microsoft needs to be premium, showcasing the potential for the software Microsoft creates. Even the company's Surface tablet PCs, which have reportedly not met sales expectations since their fall debut, are high-end gadgets designed to highlight the best of Windows 8.

To appeal to smartphone consumers in emerging markets, Microsoft intends to rely on low-margin handsets made by partners such as Nokia that have already-established beachheads. Nokia is pushing products such as its Windows Phone-running Lumia 520 , which sells for about $180, in those emerging markets where carriers often don't subsidize phones for subscribers.

The strategy seems to have some merit. Tracking data from IDC found that Windows Phone shipments in the fourth quarter actually topped shipments of iPhones in seven markets: Russia, India, Argentina, Poland, South Africa, Ukraine, and a group of smaller countries that IDC collectively refers to in its survey as "rest of central and eastern Europe."

Microsoft certainly isn't walking away from making hardware. Though its Surface may have stumbled, the company clearly intends to build devices when its partners aren't producing gadgets that resonate with consumers.

The smartphone market in developed markets such as the United States might seem just the type of hardware business for Microsoft to jump into. After all, the partners that make Windows Phones have failed to launch a smartphone that consumers crave. In February, Windows Phone held just 3.2 percent of the U.S. market for smartphone subscribers, well behind Google's Android at 51.7 percent and Apple's iOS at 38.9 percent, according to market researcher comScore.

But the task of displacing Apple and Google with a Microsoft-made phone is monumental.

"That's not the game Microsoft is playing," IDC's Restivo said. "It wants to put Windows Phones into as many hands as it can worldwide."

 

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