A Windows Phone “Plan B”

Let me start out by saying this is totally speculative on my part, I have no information that suggests what I’m about to describe exists anywhere in Microsoft’s thinking.

Microsoft has a huge amount riding on the launch of Windows Phone 8.  OEMs have already announced compelling devices.  Windows Phone 8 itself seems (which is all we can say since Microsoft has still not fully revealed it) quite compelling.  The carriers are largely saying the right things.  Now the devil is in the details.  Which devices on each carriers at what price points.  How committed are the carriers to marketing and selling Windows Phone?  What will Microsoft itself do to promote Windows Phone 8?  Will the concurrent launch of Windows Phone 8 and Windows 8 help or hurt the phone efforts?  Etc.

It won’t take long, perhaps as little as 3-6 months, to get a good read on where Windows Phone 8 is going.  Either Windows Phone market share growth accelerates substantially or it doesn’t.  The worst outcome is that it accelerates somewhat but that you can’t draw a conclusion about where it will be in a couple of years.  But assuming the growth rate accelerates to the point where talk about Windows Phone being the third major ecosystem goes from wishful thinking to accepted reality, Microsoft probably sticks to its current strategy.

But what if Windows Phone 8 doesn’t take off?  If WP8 doesn’t take off why would anyone think that a Windows Phone 9 would?  To put it bluntly, either WP8 is a winner or Microsoft has no role to play in the traditional mobile phone marketplace.  So what is Plan B?

I’ll start with the recent Steve Ballmer revelation that Microsoft is becoming a “devices-and-services” company.  Some people think this was just a random statement in an interview, but I’ve heard Steve has been using this phrase internally for well over a year.  And certainly there have been multiple revelations over the last year that support this as being baked into the strategy rather than just a recent observation.  So what if Microsoft brought “devices-and-services” to the mobile phone market?

Just coming out with a Microsoft-branded Windows Phone isn’t what I’m talking about.  And sure Microsoft has some services tied to Windows Phone.  But I’m talking about something bigger.  If Microsoft truly can’t crack the traditional mobile phone market, how could it disrupt it?

Before I go on I know you’re already thinking that Google tried to disrupt the traditional mobile phone market with the Nexus One.  Really?  Coming out with your own unlocked device that you only sell online constitutes disruption?  Coming out with a device that you still had to get service from a traditional carrier constitutes disruption?  Google’s attempt was half-hearted and a losing proposition for most end-users.  It was good as a “North Star” kind of offering to drive OEMs, but never constituted a real challenge to existing market dynamics.  Forget them as a data point.

A real challenge to existing mobile phone market dynamics requires you to remove the carrier business relationship from the consumer experience.  That seems like an almost insurmountable challenge to me, yet it is exactly what a Microsoft Plan B would have to do.  Microsoft would need to find a way to sell a complete and compelling mobile “devices-and-services” experience that it controlled from end-to-end.

That Microsoft would have to build its own phone is a given in any Plan B.  That’s the easy part.  The hard part is what to do about the carriers.  No, Microsoft would not acquire one nor build out a physical network of its own.  That’s both impractical (on a global scale) and financially foolish (given how capital-intensive it is).  But it could become a Mobile Virtual Network Operator (MVNO).  Microsoft would then be capable of selling an end-to-end experience that included the device, the underlying communications service, and added value services such as music streaming.

By going the MVNO route Microsoft would be freed from carrier decisions about which phones to carry, how to price them, how to promote them, how quickly to update them (!), who shares in what parts of the subsidy pie, lock-in terms, etc.  It would own its own destiny.  On the flip side, it would lose the carriers’ large retail footprint and healthy marketing budgets.  And carriers have developed new techniques, such as family plans, that make switching very unattractive for the consumer.  But if WP8 fails using the traditional carrier model, this is a tradeoff that Microsoft would be forced to make.

In order to succeed with an end-to-end strategy Microsoft would have to accelerate the growth of its own Microsoft Store retail footprint world-wide.  It would also have to forge new retail partnerships to replace the large carrier retail footprint.  Just using the U.S. as a model, a strong partnership with Walmart (which fyi already has its own MVNO) to go after entry-level and budget sensitive buyers would be crucial.  A partnership with Best Buy, whose focus has been shifting towards Mobile, would give it a nationwide footprint aimed at the heart of the market.  There are plenty of other opportunities to build a good retail presence, such as Radio Shack, Target, Cartoys, Staples, etc.  Microsoft has existing (non-phone) relationships with almost all the players, but it would require a substantial investment to build those into what is necessary to succeed in the mobile phone space.

Microsoft would also need some unique angles in order to differentiate their offering, and allow for unique marketing efforts.  One that comes to mind is a focus on landline replacement.  Freed from traditional carriers resistance to alternatives to their voice and SMS services, Microsoft could seamlessly integrate Skype into their end-to-end experience.  Not only would this allow Microsoft to reduce the amount of bulk service the MVNO must acquire from the underlying carrier networks, it offers the possibility for all kinds of interesting home and office configurations.

There are many other areas that Microsoft can differentiate on, such as customer service.  Which is to say that the approach I’m describing offers amazing opportunity, but is also fraught with risk and expense.  I haven’t even touched on the fact that this would launch Microsoft into a regulated telecommunications business.

So there it is, a Plan B for Windows Phone.  Put simply, it’s go it alone.  Truly alone with regard to the existing mobile phone market.  Is it a crazy idea?  Yes.  Could it happen? Yes.  Could it succeed?  Your guess is as good as mine.

Google has toyed with the MVNO approach, but there are no signs that it is actually going to try that route as a strategy.  Imagine if Microsoft followed this approach out of desperation, and Google did it out of its longstanding desire to disrupt the current carrier model.  Google’s efforts would help legitimize Microsoft’s, and between the two they would indeed represent a threat to the current carriers.  At the first hints of success others, such as Facebook, would likely jump on board with their own offering.  This would be one of the rare cases where the interests of the software/internet companies truly converged.  In fact converged to such an extent that it challenged the telecom industry’s status quo.  And that my friends would be true disruption.

So now we wait and see if Windows Phone 8 succeeds in the market using a traditional business model.  And if it doesn’t, then we’ll see if Microsoft has the stomach to try to change everything.

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19 Responses to A Windows Phone “Plan B”

  1. Krish says:

    Great post!
    The MVNO approach is fascinating. To make it viable for the customer, Microsoft would need to negotiate highly competitive rates from the carriers globally. It would also be responsible for billing and support. It is a challenging effort that is tangential to MS core competencies, IMO. Disruptive – yes.

    I don’t see compelling evidence that carriers are blocking Microsoft from offering end to end services on a W8 phone. The OEMs are also producing good (not great) devices. The gap, I believe is the App Marketplace and just plain marketing of the product. Have you seen any Windows Phone ads recently on TV?

    • halberenson says:

      I think the marketing of the product problem is that it is hard to promote “Windows Phone” separate from a specific device. Android had the same problem, and it was fixed (in the U.S.) by Verizon’s marketing of the Droid phone. Besides, I think Microsoft deferred most of the promotion it would have done over the last 6 months for the launch of WP8. But the biggest problem with the current approach is that it requires a buyer to be directed to, or at least not dissuaded from, a Windows Phone by the carrier’s sales people. And that just hasn’t happened in a big way. Microsoft can pour all the dollars it wanted into advertising Windows Phone, but if the carrier sales rep says “you probably would be better off with an iPhone” when the buyer walks in the door then all that advertising was wasted.

      Carriers have historically blocked competing services. This continues is some cases, for example AT&T has blocked Apple’s Facetime, and will continue to block the use of the Facetime on its traditional service plans. Beyond that there are services you’ve never seen offered because the the carriers made it clear they wouldn’t support those features. For years you didn’t get Messenger on Windows Mobile devices because the carriers made it clear they wouldn’t sell a phone with it. Ever wonder why Microsoft’s Lync doesn’t offer full VOIP support on smartphones? It basically just offers access to the GAL and IM support. Hmmm.

      Yes carrier resistance has been breaking down. But anytime a software vendor or OEM wants to add a feature they have to see if it is OK with the carriers. And that is something an MVNO approach bypasses.

      • fluxman says:

        Even if Microsoft had its own MVNO, the same marketing problems in non-Microsoft owned retail channels will occur. A customer still has to be directed to Microsoft’s phones. Sales personnel still have to be incentivized to push the Microsoft product. I don’t see how the retail situation can change to Microsoft’s favor.

  2. Joe Wood says:

    Interesting. But if the MVNO route was feasible wouldn’t Apple have done it already? Surely they’re in the best position and a tradition of ‘going it alone’.

    Also, I couldn’t imagine an OEM relationship for phones. If the OEM relationship continued for Win8 and WinRT – by extension wouldn’t the phone business be pushed as a ‘better together’ proposition from the same manufacturers?

    Like in the battle with Sony over the playstation, Microsoft really needs a ‘Halo’ type service or feature for WP8 that puts it over and above the competition.

  3. Great Post!
    MVNO approach is fascinating. For this to succeed, Microsoft would need to negotiate highly competitive rates from the carriers globally. Throw in support, billing and you wonder, how well has Microsoft done historically in such areas. Is this something that MS can do well? I think it is beyond core competecies. Disruptive, yes. What regulations are there that force the big carriers to sell to MVNOs?

    I do not see compelling evidence that carriers are blocking MS from offering rich end to end services on the Windows Phone. The gap I see is in the App Marketplace and general marketing buzz. An orchestrated marketing campaign wth the carriers would be helpful. I have not seen a recent Windows Phone ad on TV. I get bombarded with iphone adds everyday.

  4. Tom says:

    When iPhones get a $350 subsidy and Android/WinPhones only get $200, it is awfully difficult to compete against iPhone. Windows Phone is doing better in Europe than in America, and iPhone is doing worse in Europe than America. That’s precisely because of the no-subsidy model that prevails on that continent.

    So it would only be logical to sidestep the issue completely by selling both devices *and* services.

    On the other hand, between the Xbox/Bing losses and all the bad acquisitions it made over the past ten years, Microsoft could’ve bought T-Mobile USA by now. I’m not so sure that buying a US mobile carrier would be such a terrible idea.

    After all, an MVNO gets you all the hassle of a regulated business, plus customer service overhead, plus reputational risk. Basically, everything wrong with being a carrier, except for the capex. But Microsoft has a AAA credit rating. AT&T is A-, Verizon is A-, Deutsche Telekom is BBB+, Sprint is junk. Microsoft has a funding advantage over all of them. Capex should be the last thing it fears.

    The main danger would be that other US carriers stop carrying Windows Phone. But I don’t see that an MVNO approach is that much better. This isn’t Amazon or Google bundling bandwidth with Kindles or Chromebooks. Microsoft would be selling phones and bundling service — the carriers’ bread-and-butter.

  5. Paul says:

    Good discussion. It seems either they start making significant progress in Europe and China, enough so they can later circle back and take on the US, or else Plan B (or is that now Plan C, D?) is required. They must have significant wholesale agreements in place already for Skype. And I guess they could buy someone like Clearwire in the US. They could also leverage other partners, meaning not just their still potent army of resellers but also companies who also have something to fear from the continued dominance of Google and Apple (i.e. Facebook, Amazon, etc). Unfortunately those two seem to be considering their own phones and using Android of some description. But maybe the enemy of your enemy still appplies…

  6. Bob - former DECie says:

    Have you been reading Charlie Kindel’s blog 🙂
    BTW, as far as I can tell Radio Shack is dead. I can’t recall the last time I saw a Radio Shack store and didn’t their latest CEO quit recently?

    • halberenson says:

      Radio Shack stores are everywhere, just no one notices them 🙂

      • Bob - former DECie says:

        You could be right. The one closest to me closed about 3 years ago. I checked the RSH website and there is one not too far from me, but I rarely go by it because it’s such a hassle getting through the highway intersection there. I must admit, I’m not sure why I would have a reason to go to a Radio Shack store.
        I just checked their stock. It closed $.04 above its 52-week low today @ $2.05. They are somehow able to keep their heads above water and avoiding penny stock status.

      • halberenson says:

        BTW, the evening we had this exchange Jimmy Fallon was making Radio Shack jokes on his show

  7. If you want to talk about true disruption, then Skype deserves much more than half a paragraph: Killing the concept of “phone number” makes plenty of sense in today’s world (with all the price drops and features that it brings).

    Between the brand recognition of Skype and maybe Facebook, Microsoft could launch a truly global initiative (yes, the US is important, but it is still small compared to South America, Europe, Asia and MEA).

    Of course, that would be the long term goal. In the short term, they would still need phone number compatibility.

    • halberenson says:

      I agree with you, but didn’t want to turn this into a Skype-centric post.

      One interesting data point is that at one point there were many Skype phones available, but they have disappeared. I imagine that was in part due to the WiFi requirement and in part due to the desire for better integration with traditional phone networks. Thus a traditional MVNO is probably more important in the short run.

      But one way Microsoft could have things both ways (current OEM/carrier model and its own phone) would be for Skype to offer it’s own Windows Phone. In other words they would just be acting as another carrier from the perspective of the Windows Phone division.

  8. Lots of very basic problems with this:

    MVNOs are country-specific: Microsoft needs Windows 8 to work everywhere. Is MSFT going to launch them in 20-30 markets? All with very different operating dynamics? And can it wait the 2-3-4 years that that would take?

    ‘Launch an MVNO’ is about as easy as ‘build an ecosystem’, as Helio and Amp’d showed. You need massive investment in distribution, marketing and customer support, as well as expertise in pricing and, well, the knowledge of how actually to run such a business. And then you need to do it from scratch, country by country.

    People choose their network first, then the phone. The evolution of the iPhone in the US makes that pretty clear: AT&T iPhone sales didn’t fall at all when VZW started selling it. An MVNO with only one phone would need to change consumer behaviour radically: choose the phone first, then look for a network.

    If your thesis is that WP isn’t being marketed enough, why do you need to be selling the SIM card to do that? WHy invest cash n creating an MVNO – why not just spend that cash on marketing the platform directly?

    The existing operators will always have far more stores than a new MVNO: better to get them to sell the product.

    And so on, and so on. Essentially, this is like arguing that Boeing should create its own airline to boost 787 sales. You invest massively in a very risky proposition that wouldn’t really solve the problem anyway.

    (Disclosure: I worked on international MVNO strategy for a mobile operator)

    • halberenson says:

      Any move in the direction of an MVNO is clearly a desperation move, which is why it is a Plan B.

      The economics of increasing the marketing budget without a concurrent way to increase revenue per unit doesn’t work out. In the proposed Plan B Microsoft’s revenue per unit goes up by more than an order of magnitude. Does that pay for a global MVNO strategy? The accountants would be looking very closely at that question. Also keep in mind that in acquiring Skype Microsoft purchased, or is already investing in, much of the required infrastructure. In other words, Microsoft is already building a next-generation telecom carrier and the question may simply be do the dynamics of the mobile phone market require them to proceed more aggressively and dramatically.

      Finally, Boeing has “been there and done that”. Boeing formed an airline as a way to sell it’s planes. The government later passed a law prohibiting a company from being both a manufacturer and an airline, forcing Boeing to spin off United Airlines as a separate entity.

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