Bach answers the call at Microsoft

The initial Windows phones were clunky and quirky, but Microsoft has kept at it, winning support from key carriers and device makers. It scored a major coup in 2005, when Palm announced it would start selling Windows Mobile-based Treos. Microsoft's software has since found its way into other must-have gadgets, such as Samsung's BlackJack and T-Mobile's Dash.

In an interview ahead of the 3GSM World Congress trade show in Barcelona, Entertainment and Devices unit President Robbie Bach talked about where Microsoft is going in the phone business. He touched on the new Windows Mobile 6 operating system, which makes its debut at 3GSM.

Bach also offered his thoughts on Apple's iPhone, Steve Jobs' call for an end to digital rights management and explained why a Zune phone may not be right around the corner.

Q: Apple has gotten a tremendous amount of buzz with the iPhone. I'm curious what you make of it.
Bach: Apple always brings interest to an area, and certainly, this isn't any exception. Certainly, a $500 phone is a proposition that some set of early adopters will want to take a look at. There are a lot of people who are Apple fans that will want to take a look at it. $500 plus a two-year sign-up really puts you in a certain marketplace.

The other thing I'll say about it is their strategy is quite different from ours. Our strategy focuses on helping you bridge the things you do in your work-style and the things you do in your lifestyle. If you think about Windows Mobile and the work we do integrating with mail and Exchange, while at the same time providing people with multimedia capabilities, text messaging, our Windows Live services, search, etc., we kind of span that view. Apple comes at it more from a pure lifestyle perspective.

There is certainly a market for that, but we think the bulk of the market is people who want a phone that does things both for their work-style and for their lifestyle.

One of the specific things about the iPhone is the fact that it is all touch screen. Prada and others are trying this too. Are buttons passé?
Bach: No, actually. I think it's a reasonable question whether touch screens or buttons are a better approach. We've had touch screens on Windows Mobile for three or four years.

Depending on what you want to use the phone for, sometimes touch screen is a good thing, sometimes it is not. The experience we've had with people who want to type (is that) touch screen actually tends to be a little difficult. People tend to prefer the tactile feel of doing buttons.

Likewise, if you are going to do a lot of video on a device, having a screen that's constantly got your hands on it--constantly getting pounded--may or may not be the right thing.

I think it's an open question. Certainly, the touch screen gives you a little more flexibility, in the sense that you can project on that screen whatever you want. There are tradeoffs you have to make. We'll have both on Windows Mobile, that's for sure.

I'd be remiss if I didn't ask your thoughts about Steve Jobs' letter. Is it time for an end to digital rights management?
Bach: Our job really is to provide the tools and the technology that we get requested from our operator partners and from our media and content partners. I don't have a strong view about DRM, other than when people ask for it, we're going to do a great job implementing it and driving it.

The only people who ultimately get to opine on that are the people who are the content owners themselves. We're huge believers and will always be believers in protecting intellectual property. DRM is certainly one of those ways to protect that intellectual property. You are going to see us continue to do great work on DRM, because we think it is going to be a part of the landscape going forward.

Microsoft is announcing Windows Mobile 6 at the show. Why is this release important for Microsoft?
Bach: If you look at the progression of our business in the Windows Mobile space, we've now reached a critical milestone. We've gone from being a small provider with a few handsets and a few operators to--we have now almost 50 operators and almost 150 phones. That business is growing quite well.

What do you see the role of gaming on the phone? Is it just casual games, or is there an opportunity for more? If so, what does that "more" look like?
Bach: Generally the assumption--and I think it is probably right--is that this is this will tend to be more casual, broad-based games. Games that I am going to spend 5, 10 minutes on; not games I am going to spend 5, 10 hours on.

The final thing you have to say is, "OK, what's the business model? Is this a subscription, is it a paid-for download? Is it an advertising-based model?"

This is a place where I don't think there's a lot of consensus yet. I think the marketplace is still evolving a reasonable amount. It's not like in the PC gaming market, or in the console gaming market, where we have an established model--You go out and pay $49 or $59 for a game, you take the package home and put the DVD in. It obviously doesn't work that way. The operators are involved, and there's more people involved in the ecosystem. I think the business model part is, in some ways, the most challenging. How much absolute dollars are there to flow around?

In the consumer space, we are hearing about a big shift to advertising-supported business models--a lot of predictions that consumers are going to spend less on software generally. What do you see as the role of ad-supported software?
Bach: What you are going to see is a diversity of business models. I think people are going to continue to buy packaged software--I'm a firm believer in that. It's a way people are comfortable with buying. I think that people will buy that packaged software in a store sometimes. They might buy it online. The idea that somehow people are going to stop buying physical goods is just wrong.

On the other hand, I do think download models are a valid model, and I do think ad-supported models are a valid model that people will add. You'll see us doing more ad-supported work across all of the things we do. In each of our platforms, we do work to support that type of advertising model, so that other people can do it. It's not just a Microsoft thing.

The real challenge on a phone and on any small device is, "What is the ad model? Is it the same ad model that we see happening online on the PC?" I'd be a little skeptical of that myself. Maybe it's more commerce-based on a phone. Maybe it is more location-based.

Another area that has been important in the mobile device space has been music. The biggest thing Microsoft has been doing in the music area lately has been Zune. What is the role of Zune in the phone market?
Bach: We get asked the question a lot--about whether we are doing a so-called Zune phone or some kind of phone device that plays music.

The Zune team is off to a good start and is very focused on delivering the music scenario on a music device. You can assume that's where we are going to be focusing most of our attention.

Now the company as a whole is very involved in the music space, across the board. We're doing a lot of work with operator partners who want to bring out their own music services. We continue to invest heavily in our video and music codecs, and in our DRM technologies around those products.

People have talked about the idea of a Zune phone. That wouldn't necessarily be the only way to get Zune content onto a phone. Presumably, any Windows Mobile phone could play Zune content, if you guys decided to go that way. It could be hardware partners. Do you see all of those as potential possibilities?
Bach: Any of those are possibilities in the future. Think of it as us being focused on music on a Zune device. That's our primary goal right now.

So things like having different form factors of traditional music players, video services--those things would be higher on the priority list?
Bach: Basically, expanding on the things we've done with Zune already is the top, middle and the bottom of the priority list right now.

It's taken Microsoft a long time to get to the place it is at in the phone business. What are the key things that the company still needs to do in the phone area?
Bach: Windows Mobile 6 is a huge stride forward. Of course there is more work we can do. One of the key milestones we have reached is getting great hardware design and great operator integration. As you look to the future, it's now taking advantage of that.

I actually think brand development is important to us in this space. If you look at a bunch of the devices out today--cutting-edge things like the Q and the Dash and the BlackJack--getting people aware that those are Windows Mobile devices, and that when they go into a store that they want to ask for a Windows Mobile device, is an important objective for us.

Today, people actually don't think about the company RIM (Research In Motion) as much as BlackBerry the brand. We want people when they think about these handsets, not so much thinking "That's a phone from Microsoft," because it's not. What we want them to think is "Oh, that's a Windows Mobile phone and that's what I want."

Who do you view as the most serious competitors in the phone space?
Bach: Certainly the two people that have the most attention here would be RIM/BlackBerry and Nokia/Symbian. We're ahead of RIM/BlackBerry today. We're still behind Nokia. They do a lot of feature phone work, so that makes the volume comparisons really tough for us. In the business space, certainly, we think we're getting tons of traction, even in competing against Nokia.

On the Xbox side of things, is there any update there?
Bach: Xbox continues to go quite well. We continue to see the kind of market momentum we had coming through the holiday. January went, I'd say, as we planned it to go. It's always a good month.

The game lineup continues to look awesome. Gears of War has continued to sell very well, and as an online phenomenon, is really driving Xbox Live in a big way.

So the shipment cut on Xbox is really just an inventory thing, then?
Bach: It's all part of managing the business. Everybody always asks me, "So when are you going to make money?" We've told people we're excited about the volume we're at. Getting to 10 million was a big milestone.

But we've also told people that next year, we're going to make money and we're going to run the business to make money. Given where we see competitors priced and where we see their volumes in the marketplace, we feel great about where we are. We're taking the opportunity to make sure we are optimizing the business model. That may mean a few fewer units in the short term, but we think it means a bigger and better business in the long term.