Microsoft needs more than Mobile 6.5, soon

NEW YORK Mon Oct 5, 2009 3:15pm EDT

NEW YORK (Reuters) - Microsoft Corp (MSFT.O) needs to quickly follow its Windows Mobile 6.5 launch with a more competitive cellphone system or risk losing out to iPhone, BlackBerry and Android in the cutthroat smartphone market.

On October 6, several manufacturers plan to unveil phones running Windows Mobile 6.5, Microsoft's latest software. It includes touchscreen capabilities, an applications store and the ability to customize certain phone display elements.

But since consumers have seen similar features in rival phones for some time, analysts say Microsoft still lags well behind rivals Apple Inc (AAPL.O), Research In Motion RIM.TO, Google Inc (GOOG.O) and Palm Inc PALM.O.

"They're still significantly behind in terms of consumer user experience," said Current Analysis analyst Avi Greengart. "If they don't catch up soon they'll start losing relevance."

To be sure, Microsoft has a good position and room to grow among corporate customers, as Windows-based phones are a relatively easy and cheap option for technology managers who already use Microsoft's email and desktop computer software.

But a lack of prominence in the bigger market for mobile consumers could be a serious impediment going forward as consumers are instead drawn to iPhone's simplicity or Palm's tight integration of social networks like Facebook.

"The majority of the market is consumer so even if (Microsoft) were to retain just the enterprise that would be missing out on the bulk of the opportunity," Greengart said.

While research firm iSuppli sees Microsoft tripling cellphone shipments using its system to 67.9 million by 2013, iSuppli analyst Tina Teng sees it losing market share until such a time as it launches a substantially improved system.

"Perhaps the most glaring obstacles faced by Windows Mobile reside in its own shortcomings," Teng said in a research report. "The Windows Mobile user interface looks poor compared to some of its slicker competitors - particularly Google's Android and Apple's iPhone operating system."

However Teng sees Microsoft launching Windows Mobile 7 next year, with upgrades to the user interface and browser as well as multi-touch controls, making it "much more competitive."

IDC analyst Ryan Reith sees Microsoft's global market share rising to 13.6 percent in 2013 from 9.2 percent mostly due to its enterprise business but in the same time period he sees Android's market share rising to 11 percent from 3 percent.

STAYING COMPETITIVE

Microsoft director of product management Aaron Woodman said his company was already working on its next updates.

"I think you'll see faster and faster innovation from us," Woodman told Reuters, without giving any timetable.

Some analysts say Microsoft needs a dramatic strategy shift to stay competitive with rivals such as Google's Android as phone makers are increasingly favoring that software over Windows Mobile.

While many Microsoft's phone partners are still building devices based on Windows software, others, such as HTC Corp (2498.TW), are turning to Android for their most high-profile phones. One client, Palm, now favors its own webOS system, while another, Motorola Inc MOT.N, has reorganized its entire smartphone focus to Android.

One advantage Google has over Microsoft is that its Android software is free, whereas Microsoft charges licensing fees to phone makers that use its software.

These fees will become increasingly difficult to justify unless Microsoft creates a more competitive mobile platform, analysts said. But an elimination of royalty fees would be difficult as software licenses are the lifeblood for the company which dominates the desktop computer software market.

"If they remove the royalties then that poses big questions for a lot of Microsoft's other business units." said Geoff Blaber, an analyst at CCS Insight. "If you remove the license fee, where is Microsoft going to make its money."

Some analysts say the company could boost the visibility of its mobile brand by developing its own phone with hardware that is tightly integrated with Windows software.

Such a device would likely be manufactured by another company, according to IDC analyst Ryan Reith. But Microsoft executives have long denied rumors that it is planning its own phones. And there is a danger it loses its phone software customers if it sets itself up as a rival, said CCS's Blaber.

Aside from attracting consumers, Microsoft also needs to capture the imagination of third-party application developers who have rushed to create a wide variety of iPhone applications, helping Apple boost iPhone sales.

Current Analysis' Greengart said Microsoft should instead revamp its own phone software by looking to other parts of its consumer business. He sees Microsoft latest Zune music player as a sign it can create appealing products.

"The Zune HD interface is extraordinary," Greengart said, referring to the graphical display of musical information. "It is a more interactive music playback experience than Apple's."

So re-purposing the Zune interface could be a good start for a compelling mobile platform, said Greengart who also noted that the success of Microsoft's Xbox game console is another sign that Microsoft can appeal to consumers.

"Based on what they've seen in other areas I've no doubt Microsoft can do it. Windows Mobile 6.5 is not the answer," Greengart said.

Microsoft's Woodman declined to comment on future products but said Zune was a "wonderful example" of what Microsoft can do in the consumer arena.

"I think we're doing the right first steps with 6.5. We're starting to leverage assets around the company to be successful in this space."

(Reporting by Sinead Carew; Editing by Tim Dobbyn)