SEATTLE (Reuters) - The new Windows phone software is a big improvement on its predecessor but may not be enough to reverse market share losses, and Microsoft Corp may have to eventually buy a Nokia or BlackBerry maker RIM to get back into the game.
Apple Inc has raised the smartphone bar with its distinctive iPhone, and Google Inc is catching up fast with its Nexus One phone and Android mobile software.
Microsoft, used to a near monopoly in the PC market even though it doesn’t make any hardware, has found the same rules do not apply in phones. Its Windows software has not been able to deliver the same consistency of performance across a range of different phones.
“It’s something I know they’ve talked about — buying Research in Motion or even Nokia,” Toan Tran, an analyst at Morningstar, said of Microsoft. “To really compete in this business, Microsoft needs to get into the hardware business, where they are able to control the entire user experience.”
“Apple has shown that’s the model that works,” Tran added. “In a consumer device, people just want something that works, they don’t want something as complicated as a PC.”
Microsoft, which has $9.4 billion in cash and equivalents and $26.7 billion in short-term investments, declined comment on whether it has considered buying Finland’s Nokia, with a market value of some $51 billion, or Canada’s Research in Motion Ltd, with a value of about $39 billion.
Wall Street has long speculated that Microsoft might make a play for RIM, Nokia or Palm Inc. But such talk is almost always accompanied by skepticism over whether Microsoft would want to get into the hardware business and compete with phones that already use its Windows software.
The company’s attempted $47.5 billion takeover of Yahoo in 2008 shows that it is not afraid of large deals, but Chief Executive Steve Ballmer this week poured cold water on the suggestion of a big acquisition in the mobile sector.
“The word ‘ever’ is a big word, but I certainly don’t feel like that’s the right strategy for us today,” Ballmer told Reuters at the launch of the new phone software in Barcelona.
The latest smartphone market figures show Microsoft’s share fell to 8.8 percent last year from 13.9 percent the year before, according to tech research firm Canalys. In the same time, Apple’s share jumped to 15.1 percent from 9.6 percent.
Symbian, the system used by most Nokia phones, remained the leader last year with 47.2 percent of the market.
Microsoft pledged to work more closely with handset makers — such as HTC, Samsung and Sony Ericsson — to ensure a level of consistency across many phone models, and to make the most of the touchscreen and multi-application functions of the new Windows Phone 7 software.
But some analysts say Microsoft should build its own phone. Tech blogs have published photos of what they say is Microsoft’s planned “Project Pink” smartphone, which would be a more direct rival to the iPhone.
“Buying somebody would be a shortcut,” said Kim Caughey, an analyst at Fort Pitt Capital Group, which owns Microsoft shares. “But if they can give business users more functionality (with the new phones), they have a shot.”
Morgan Keegan analyst Tavis McCourt said he could only see Microsoft buying a phone company if its mobile software lost so much market share that upsetting other phone partners was no longer a concern. But he said Microsoft was not at that stage.
“Microsoft doesn’t want to be in the hardware space. It would alienate its other hardware customers,” said McCourt.
In any event, Windows Phone 7 will not hit the market until the holiday shopping season, so it will be at least a year before its success can be gauged. In that time, Apple, RIM and Nokia will all have upgraded their own offerings, changing the game once again.
“That’s a lifetime in the mobile space,” said Jack Gold, head of J. Gold Associates, a technology research firm that focuses on the mobile sector.
He said Microsoft’s focus should be on making sure that as many mobile users as possible can connect to its services, such as Outlook e-mail, Windows Live and Excel, or the newer Zune online marketplace and Xbox gaming system.
“It’s like Exxon Mobil saying ‘I don’t care what brand car you buy, just come and get gas from me’,” said Gold. Making a hardware acquisition would be a “mistake,” he added.
Additional reporting by Sinead Carew; editing by Tiffany Wu and Steve Orlofsky