Gates sees big dollars in little devices

Bill Gates doesn't think his company has been slow to crack the cell phone market. He just thinks the little devices have yet to catch up to the power of his company's software.

Still, with cell phones quickly gaining the power PCs had not that long ago, Microsoft's chairman sees a bright future, in which the company's operating system can quickly gain share from Nokia and others that run rival software.

Gates spoke to CNET News.com on the eve of a speech announcing Windows Mobile 5.0, the next version of Microsoft's operating system for handhelds and cell phones. In the chat, Gates outlined the company's mobile strategy, explained why Microsoft is steering clear of the portable-game market (for now) and described why he's happy that Microsoft is an underdog, for a change.

The richness of software on mobile devices is just at the beginning. We see certainly a decade's worth of work where mobile devices can get richer and richer.

Q: Microsoft has been trying to crack the mobile-device market for some time. What makes this market so important?
Gates: Essentially, you find us in every device where software makes a big difference; Microsoft comes in and sees how we can make a contribution.

The mobile space, there are so many neat things that can go on if--for example--you use Outlook and our phone, if you use Office and a phone, if you use our mobile format and a phone. The richness of software on mobile devices is just at the beginning. We see certainly a decade's worth of work, where mobile devices can get richer and richer.

Microsoft did get off to a fairly slow start in the handheld and phone arenas. Why do you think that was?
Gates: If you take the handheld space, I wouldn't say we were slow there. It depends on if you have this expectation that we always get some gigantic market share overnight. We don't really have that expectation of ourselves except over a very long period of time.

We also bet on the hardware growing into what we are doing with the software...If the primary thing that people are doing is not data-oriented, our software--anybody's software--can't make that much difference. It's really only as data browsing, e-mail and media and software applications have come in and become very important on the phone that people are seeing the uniqueness of what we are offering.

If you look at this two years ago, we basically had Orange, in Europe, shipping our devices. If you go back three years ago, we had nobody shipping any phones from us...Now, even before we were shipping...Windows Mobile 5.0, (we have signed with) 68 operators in 40-plus countries. We'd expect with Windows Mobile 5.0, between now and the end of the year that we'll expand that. Still, as a percentage of the market, compared to, say, Nokia, we're a small percentage. We expect our percentage to grow at quite a healthy clip.

We're seeing some interesting intersections of cellular and other wireless technologies. Where do you see Wi-Fi fitting into the cell phone world?
Gates: One of the technological things we've done with the 5.0 platform is to make it easy for our hardware partners to plug in different radio stacks. This is the first time we've had a partner building a 3G (third-generation) phone around our software.

We also support Bluetooth, Wi-Fi. We have a number of partners who have talked with us about building phones that support both wide-area wireless and support Wi-Fi. It's up to them to announce how they are going to offer and price those products, but a number of operators are building those products.

A good place to start is having the (cell phone) operators like you.

Microsoft has crafted a lot of deals in the mobile world in recent months, in many cases partnering in one area with a rival from another area--companies like Symbian, Nokia and PalmOne and RIM (Research In Motion) with a recent mobile instant-messaging deal. What is the strategy?
Gates: One is for us, by ourselves, to come out with new features. We do a vast amount of that. The second thing we do is take scenarios that require devices working together and participate in licensing or the creation of standards.

For example, in the case of music, music on the phone will be a very big scenario, both phones with solid-state storage or, eventually, disk-based storage. We took our Windows Media format and said let's make it available and very inexpensive. We hope that makes the music scenario grow up on the phone. We did license that to Nokia and others. Likewise, the whole scenario of mail on the phone is one we think has also been a little complex.

You have the IM group having to deal with Research In Motion, and obviously they are a competitor to Windows Mobile in doing Exchange on mobile devices. Similarly, PalmOne right now runs the rival Palm operating system, but Microsoft has crafted a deal so it can run your ActiveSync technology. It seems like a lot of different strategies.
Gates: Everything we do along these lines, certainly I'm involved in making sure we are coherent in how we do those things. Take our media formats--we've been licensing those to everyone in sight. Having some of the key technologies be available elsewhere drives those scenarios to critical mass. What the Windows Mobile team does then is make sure they've got the best implementation. I can say with great confidence, even where we're licensing out all that technology very inexpensively, our share within this industry is going to grow quite significantly.

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You've talked about a willingness to partner with competitors where you can to drive the industry. Is there more room for partnership with Linux vendors? I understand that (Microsoft CEO) Steve Ballmer met with (Red Hat CEO) Matthew Szulik at the end of March. I'm curious if that relationship is evolving.
Gates: We're always talking to people about standards, like Web services standards or how we get systems to work better through interoperability. I don't think you can say anything about the open-source community as a whole because there are so many different players in there with so many different products. There is nothing monolithic about chaos. There is more variety of everything. There are some of those players that are looking at commercial type revenues. We'll certainly spend time with those people to see what we have in common and what we can do for customers together. I wouldn't say that there is some big new development.

As the commercial players in the Linux world evolve, it seems they become competitors, like you mentioned Nokia has in the cell phone space.
Gates: That's right, the people who do commercial stuff, we'll be in touch with all those people and have an ongoing dialogue, as well as competing with them in the marketplace.

Gates makes play for Portable Media Center (Jan. 2005)

What about security on mobile devices? Historically, going back a couple of years, many of these devices didn't even have password protection. Where are things today?
Gates: Security is a topic that spans a lot of things. There's quite a bit of things we've done, both in terms of letting operators set up authentication the way they want to and also making sure that the code that gets run on the phone is authorized code. That involves code signing and having the control there, so only the things they decide are going to be on that phone are on the phone.

Do you think we are going to start to see phones as a growing area from a threat standpoint?
Gates: Certainly in the area of spam and identity theft there are a number of countries that have seen that on mobile phones. They've had to start to think through some of the same things that have been critical to think through on the PC. Because there is less variety of software, some of the issues haven't been as acute. But some of the things--spam e-mail and identity theft--have actually, in some ways, been more acute. The bad guys will try and exploit any weaknesses in that network the same they will for any digital device.

You (have at times) mentioned speech recognition. When you look out a few years, what do you think is going to be possible on a high-end smart phone?
Gates: Even with Windows Mobile 5.0, we've got the beginnings of this with what we call integrated voice command capability. Obviously, it is a relatively finite vocabulary. Something like "What's my next appointment?" gets recognized. As we're being given even more memory and processing power, we can do a better and better job on speech recognition. Eventually, your whole profile of how your speech is recognized is another thing that will roam. As the phone (learns your voice), those bits roll up to your PC and (it) gets better, and vice versa.

One of the other areas that you guys have talked about, longer-term, is having more-detailed presence information, where you might have a phone that knows where your buddies are in relation to you.
Gates: One of the new things in the platform is what we call the location API (application programming interface). It gives the GPS location up to the software and then, if you have chosen to reveal your location, say, to your buddies...and if they decide to reveal to you, than we can use map-type displays and you can see where those people are.

That scenario, in particular, is one that we think is really explosive. It will become just common sense. It's obvious you ought to be able to push and see a map and there's the information.

Microsoft made an interesting choice when it was first trying to get into the cell phone market. There weren't a lot of tier-one cell phone makers lining up, but Microsoft went to some of the contract manufacturers that make PCs in Taiwan and elsewhere. It seems like early on Microsoft recognized that the carriers were the gatekeepers and found another way into the market.
Gates: We certainly had some very important relationships with the cell phone makers, and we've done some work (increasing) the number (of cell phone makers). Samsung is talking about their plans for this platform. But the highest volume, actually, has been an Asian company called HTC that has done a lot of different things; one of them is being so responsive to the carriers.

You're right that a good place to start is having the operators like you. In fact, that's an absolute requirement. A lot of their requests about customization used to take us a lot of hand work to do what they wanted.

With Windows Mobile 5.0, we've taken a lot of the customization and made it really trivial for them to do it--the way they brand things. We make it so they can do that very rapidly. Being a friend of the operators is part of the strategy.

(WIndows chief) Jim Allchin said a couple of weeks ago that he still sees Microsoft as the underdogs. Do you still feel that way about Microsoft in the mobile space?
Gates: Well, Nokia is the leader by far. We definitely prefer the press coverage we get when we are considered the underdog in a category. We're just an underdog, keeping the guys that are on top, keeping them honest. I'm not sure what the term (underdog) implies. We are a significant factor in the market even beyond our market share. There will always be many companies in this space and, at least for the foreseeable future, Nokia is the leader.

One area of mobiles that Microsoft hasn't gone after yet is portable gaming. Do you see that happening at some point?
Gates: It is very interesting, the increased amount of gaming taking place on these phone devices.

But in terms of consoles, you have the Xbox--a desktop console--but there is a pretty big portable console market. Is that something Microsoft is interested in?
Gates: Obviously, Nintendo is dominant in that market, and everybody is watching what Sony can do with the PSP. Speaking from Microsoft broadly, we like that Sony is off worrying about the PSP and thinking about that while we are worried about the TV-based console, the next generation of Xbox that we are moving forward on. There actually is a dedicated device that uses Windows CE. It's fairly cool. I've played around with it. But we don't have any current plans to be in there with a dedicated product. We'll keep making our phones good (starting places) for (gaming) and see how that space shakes out.  

solid-state storage or, eventually disk-based storage. We took our Windows Media format and said let's make it available and very inexpensive. We hope that makes the music scenario grow up on the phone. We did license that to Nokia and others. Likewise, the whole scenario of mail on the phone is one we think has also been a little complex.

You have the IM group having to deal with Research In Motion, and obviously they are a competitor to Windows Mobile in doing Exchange on mobile devices. Similarly, PalmOne right now runs the rival Palm operating system, but Microsoft has crafted a deal so they can run your ActiveSync technology. It seems like a lot of different strategies.
Gates: Everything we do along these lines, certainly I'm involved in making sure we are coherent in how we do those things. Take our media formats, we've been licensing those to everyone in sight. Having some of the key technologies be available elsewhere drives those scenarios to critical mass. What the Windows Mobile team does then is make sure they've got the best implementation. I can say with great confidence, even where we're licensing out all that technology very inexpensively, our share within this industry is going to grow quite significantly.

You've talked about a willingness to partner with competitors where you can to drive the industry. Is there more room for partnership with Linux vendors? I understand that Steve Ballmer met with Matthew Szulik at the end of March. I'm curious if that relationship is evolving.
Gates: We're always talking to people about standards, like Web services standards or how we get systems to work better through interoperability. I don't think you can say anything about the open-source community as a whole because there are so many different players in there with so many different products. There is nothing monolithic about chaos. There is more variety of everything. There are some of those players that are looking at commercial type revenues. We'll certainly spend time with those people to see what we have in common and what we can do for customers together. I wouldn't say that there is some big new development.

As the commercial players in the Linux world evolve, it seems they become a competitor, like you mentioned Nokia has in the cell phone space.
Gates: That's right, the people who do commercial stuff, we'll be in touch with all those people and have an ongoing dialogue, as well as competing with them in the market place.