Microsoft surprise attack!

April 28th, 2010 · 1:31 am @ Benjamin Tseng - 11 Comments

If you’ve been following the tech news, you’ll know that iPhone-purveyor Apple has launched a patent infringement lawsuit against HTC, one of the flagship (Taiwanese) phone manufacturers partnered up with Google and Microsoft to push Android and Windows phones. While HTC may be the company listed on the lawsuit, it was fairly clear that this was a blow against all iPhone imitators and especially against Google’s Android mobile phone (which was recently reported to have generated more mobile web traffic in the US than the iPhone).

But, as I’ve pointed out before, the lines between enemy and friend are murky in the technology strategy space. It would seem that Microsoft may have just thrown HTC (and hence the Android platform and other would-be iPhone-killers) a surprise lifeline:

REDMOND, Wash. — April 27, 2010 — Microsoft Corp. and HTC Corp. have signed a patent agreement that provides broad coverage under Microsoft’s patent portfolio for HTC’s mobile phones running the Android mobile platform. Under the terms of the agreement, Microsoft will receive royalties from HTC.

The agreement expands HTC’s long-standing business relationship with Microsoft.

“HTC and Microsoft have a long history of technical and commercial collaboration, and today’s agreement is an example of how industry leaders can reach commercial arrangements that address intellectual property,” said Horacio Gutierrez, corporate vice president and deputy general counsel of Intellectual Property and Licensing at Microsoft. “We are pleased to continue our collaboration with HTC.”

Bolding was, of course, my doing.

Why? Other than to just make us ask “why?” I have no idea, but I’d conjecture its a combination of three things:

Sizable royalty stream: Microsoft is an intellectual property giant. But, given Microsoft’s tenuous and potentially weakening position in mobile phones, they have probably been unable to fully monetize their own intellectual property. Why not test the waters with a company who is already friendly (HTC is a leading supplier of Windows Mobile phones), who desperately needs some intellectual property protection, and is churning out Android phones as if its life depended on it? And, if this works out, it opens the doorway for Microsoft to extract further royalties from other Android phone makers as well (and its even been suggested ominously that perhaps Microsoft is using this as an intellectual property ploy against all Linux systems as well).
The enemy of my enemy is my friend: Apple is the Goliath that Windows, Blackberry, Symbian, WebOS, and Android need to slay. Given Microsoft’s unique advantage from being the leading PC operating system, one potentially feasible strategy would be to simply stall its competitors from building a similar position in the mobile phone space (like by helping Android take on Apple) and, when Microsoft is nice and ready, win in mobile phones by moving the PC “software stack” into the mobile phone world and creating better ties between computers (which run Microsoft’s own Windows operating system) and the phone.
HTC probably made some fairly significant concessions to Microsoft: I’m willing to bet that HTC has either coughed up some extremely favorable intellectual property royalty/licensing terms or has promised to support Microsoft’s Windows Phone 7 series in a very big way. Considering how quickly HTC embraced Android when it was formerly a Windows-Mobile-only shop, its probably not a stretch to believe that there were probably active discussions within HTC over whether or not to drop Microsoft’s faltering platform. An agreement from HTC to build a certain number of Windows phones or to align on roadmap would be a blessing for Microsoft who likely needs all the friends it can get to claw back smartphone market share.

Obviously, I could be completely wrong here (its unclear if Microsoft can even provide HTC with sufficient legal “air cover” against Apple), but the one thing that nobody can deny is that tech strategy is never boring.

Tags: Android, Apple, Business, Google, HTC, intellectual property, license, Microsoft, royalties, strategy, Tech

gaganbiyani

So I love the post and this is definitely an interesting topic, but a couple of thoughts:
1. Microsoft doesn't give a damn about royalty revenue. Never would a company like MSFT make a strategically bad decision based on royalty revenue – especially not in a market as critical as mobile. So while it may be icing on the cake, I would hardly call it an answer to the “Why?” question.
2. In principle, your second argument makes sense. I would contend, however, that MSFT might be making a big mistake. Currently, its biggest competitor is Google – not Apple. There's a good TC article on that subject, but I'll summarize: Apple is the top dog in the AT&T market and nobody is going to challenge them there. While MSFT may think they can beat Apple, they're dead wrong. However, they can still beat Google, which doesn't have the name recognition (in mobile) nor the quality (imho) of Apple. Furthermore, the battle is on non-AT&T carriers, at least until Apple comes out with a Verizon phone.
3. There's no way that MSFT's Windows Phone strategy is going to help “win in mobile phones by moving the PC “software stack” into the mobile phone world and creating better ties between computers (which run Microsoft’s own Windows operating system) and the phone.” That strategy died when they decided to let the Zune team run WinPho instead of the old WinMo team. Microsoft has turned a 180 from trying to vertically integrate their PC OS with phone OSes. Now they're trying to beat Apple at its own game, providing great form factor and UX to users. It's not about vertical integration anymore for MSFT, and since they won't get another crack at the market, it's never going to be about vertical integration.
http://www.benjamintseng.com/ Ben

Shouldn't you be working on Udemy? JK, glad to hear your comments on this, shall we go “line-by-line” just like the good ol' days?

1. I agree with your first point but I'll qualify it. You're 100% correct about the mobile situation, but I think the bigger play for them here is to test the royalty/IP situation with server/desktop Android and Linux distributions.

2. I think you and I have different understandings of business definition and platform scalability. I don't believe it makes much sense to segment the phone market by carrier, mainly because software platforms can scale across carriers (a Verizon Android device could run the same applications and have the same features as a T-Mobile or AT&T Android device) and the phones themselves, adjusting for some stickiness due to carrier contracts, are targeting the same customer base. Perhaps I'm underestimating the stickiness, or overestimating the customer base overlap and platform scalability, but I don't think so (and I can guarantee you based on my industry experience here that the major phone OEMs/platform vendors/semi players don't segment the market the way you have).

3. I agree that in the short-to-medium run you're right. The current focus from Microsoft is about building a good standalone UX, because that's the bare minimum you need to play well in this space. But on a long-term strategic level, I think you are wrong. Look at Microsoft's traditional business strategy across pretty much all of their non-EDD (XBox, Zune, WinMo) business lines — Azure, Office, Microsoft's business software, Silverlight, .NET, WPF, etc. are all loosely vertically integrated (similar development stack, fair amount of portability, explicit links which increase the value of the parts, etc). And, to the extent that Microsoft is showing evidence of consolidating its development platform (i.e. with tools like XNA – http://www.engadget.com/2010/03/06/microsoft-sh…), I think this is a big strategic focus for them. The point on the Zune group taking over dev for Win Phone 7 as a 180 on vertical integration isn't a strong one when you consider that Microsoft's old Windows Mobile plays was never that integrated (lack of a single developer stack, lack of true portability between platforms, etc).

Now, whether or not a loose vertical integration helps Microsoft is an open question — it depends on if they implement this correctly, but if you believe that mobile is the next big wave of computing (except for cloud where they are well-positioned with Azure), then this is a long-term play for Microsoft which they will invest heavily in, and one of the big guns they have is a true horizontal platform covering all devices. I mean, based on the industry contacts I've had, its already worked on some level for Apple and its what they're focusing on now…
gaganbiyani

Love the back and forth. I think you misunderstood my second point:

2. No offense, but it doesn't matter what you or the industry uses to
segment the market. If I was consulting for Microsoft, I would tell them the
same thing: thinking of phones as separate from carriers is a flawed
approach, especially given the iPhone-AT&T relationship. In fact, few users
will buy a phone without consideration for the carrier, and in that way, it
makes a lot of sense to segment the market based on carrier (not based on
user type). Regardless, I'm not positing this as the end-all, be-all
segmentation, but just one that makes a lot of sense for consumers.
Consumers think of phone options based on what carriers are out there – and
I believe this will be proven when we see AT&T customers buying fewer
Android phones compared to other carriers. As such, it may not be about
stickiness (existing users staying on existing carriers), but it definitely
is about choice – and part of the choice of whether to buy an Android phone
vs an iPhone is the carrier you're inevitably stuck with.

That said, I'll take a step back and say this may change in the future -
especially if iPhone becomes cross-platform. However, I personally believe
that currently – people buy the phone and the carrier, not just one or the
other.

But my ultimate point was that WinPho competes with Android, not iPhone. I
don't think you addressed that. Think about what users think: they either
want the iPhone or they dont, and if they don't, the question is: which
device will they pick? Currently, its a binary decision (iPhone or not)
followed by a multi-faceted decision (Android, BB, WinMo). I think most
consumers make the iPhone-or-not decision first, and then worry about the
other devices. That means that from a competitive standpoint, MSFT should do
its best to take on Android first – and be the de facto anti-iPhone phone.
It isn't gonna get any traction if it tries to take on the iPhone head on.

3. On the development side, you make a great point. But the rest of it is
BS. Microsoft has done a horrrrrible job of integrating XBOX with PC or Zune
with PC. They are hardly related and their integration is no better than
iPod integration with PC (yes PC not Mac). Interestingly, Apple has done a
decent job of providing compatibility and data portability for users – it's
fairly easy to sync calendars, contacts, etc. across devices (esp with the
cool Facebook integration feature). I haven't tested Android enough to say,
but MSFT's WinMo were extremely well-integrated – I don't think WinPho will
continue that same integration.

Back to the development, I think you're somewhat right and I'll take a step
back based on that comment. I don't know how much the uptake will be for
developers to leverage XNA to build on both Xbox and WinPho, no matter how
easy it is. Why? Different devices cater to different types of apps and the
diversity of input mechanisms is a hurdle all developers have to get over to
build (regardless of code portability). As an aside, even though Unity makes
it really easy to build cross-platform games, you don't see that many of
them.

Ultimately, I think MSFT is making a great move with WinPho. I got a
hands-on demo at GDC and was thoroughly impressed. However, it isn't about
vertical integration and WinPho definitely competes with Android more than
iPhone.
http://www.benjamintseng.com/ Ben

Man, its impossible to do this with a full-time job, but let's do this debate style. So, roadmap: overview, your points, and then an “underview”

Overview: I think the vast majority of why we disagree is that we're looking at this very differently. I actually agree with most everything you're saying as short-term “tactical” suggestions. Yes, I can't view carriers and phones as distinct and the “vertical integration” on XBox and WinPho is awful — but those are short-term tactical distinctions (albeit valid ones). On a longer/medium-term “strategic” level, those points are less important because platforms can move across multiple carriers (depending on the technology all that needs to happen in the phone and software is to switch out the baseband processor and change the comms stack), because development platforms can improve, because Microsoft or Apple can do something big to change the ecosystem — successful tech company strategy is about understanding both the execution-oriented realities today (i.e. you need to partner with the right carriers in the right way to succeed in mobile) as well as having the long-term view on how the technology industry can be shaped and what drives the economics in various businesses. As a consultant, I'd be remiss to tell Microsoft to ignore the carriers (that would be the doom of any strategy they attempted), but I can't also tell them that Apple isn't a threat because its on a different carrier or that the decision to go iPhone/not-iPhone is made before anything else when the longer-term strategic issue is a war between different horizontal platforms

2. Ok, apply the overview — I think you'll agree that most of our disagreement is because of our time-frame and approach to the issue.

Where I do disagree with the substance of what you said is this idea that consumers first choose iPhone vs not-iPhone. I don't have any customer survey data so maybe I'm completely off here, but I can tell you that neither I nor many of my friends make the decision that way. The major smartphones are comparable (and you even find charts like this on the internet: http://mashable.com/2010/01/05/nexus-one-vs-dro…), and given that even within one carrier there are multiple platforms (Verizon does Blackberry, WebOS, Windows Mobile and Android; AT&T does iPhone, Blackberry, Windows Mobile, and Android [and soon WebOS]), I find it hard to believe that people aren't comparing all the phone-carrier combinations.

3. I disagree with your take on WinPho being less integrated with Windows and developers not wanting to use code-portability — again, potentially because of the point I made in the overview. The lack of traction today that you cite is hardly a reason to believe it won't happen as the platforms today simply aren't very good. Flash, XNA, HTML5, Java, etc are actively being developed and there's no fundamental economic/technological reason why they can't be good cross-platform development engines. If you consider the interests of Apple, Microsoft, and Google (to name a few), they have every reason to bet big on this as it solidifies their positions and it makes it easier for them to roll out new services/products.

The User-Interface point is a valid one — its a big difference to use a Wiimote and a keyboard — but I'd say that the main reason cross-platform development has barely taken off today has more to do with poor chip/network performance in non-PC devices and lack of rich software stacks and standards — this is what happened in the pre-IBM PC era when each computer manufacturer had their own chip, chipset, operating system, software, interfaces, standards, etc. But, once the stacks become richer and standards emerge, a lot of that complexity goes away, and writing extra code/doing an extra compile step to handle a Wiimote interface but keeping the rest of the code the same reduces the investment developers need to support many additional devices — and that economic advantage is why I believe that cross-platform is where the real battle is.

Underview: If none of this makes any sense, lets just agree to disagree — I'm smart enough to recognize that I may be completely bonkers on this one .
gaganbiyani

Yeah we'll agree to disagree.

The only thing I'll tell you is I don't think many of the things I mentioned
are going to change as soon as you do. Meaning, I'm not actually thinking
short-term; I view most of my points as being long-term true.

I think that code portability is fundamentally problematic because
cross-platform standards won't emerge (industries can rarely agree on
standards within one platform for god's sake).

Furthermore, I think carriers (both as a distribution method and as a
“feature”) make a huge difference on people's decisions to go with a certain
phone. And, btw, your friends are non-standard. In fact, the standard person
just decides whether they want an iPhone or not and then goes to the “second
tier” device. Talk to people on the street (which is what I do) and listen
to how they make their phone decisions. Almost all of them will reference
the iPhone as either a “I got an iPhone because…” or “I didn't like the
iPhone because…” (enter: too expensive, bad carrier, no need for a
smartphone, etc.). It's a binary decision.
AndrewG

Ben: Really excellent post. Your blog just gets better and better.

My view is that when Apple moves the iPhone to other carriers, it will become the standard, and there's nothing much that Microsoft (or Google) can do about it. The touch screen on the iPhone is better than on other devices, and it has much more mass appeal than the Droid or Nexus One. I strongly agree with Gagan that for the majority of people, the choice of phone basically comes down to a) are smartphones too expensive for me?, b) do I love Verizon so much that it overwhelms my love for the iPhone? If no to both, then buy iPhone. For gadget guys, the process is more nuanced.

Beyond network effects and path-dependence, my naive view is that Microsoft is still relevant only because there are huge barriers to entry to replicate a program like Excel (look at Google Docs), or the security features of Windows. In part because of their monopoly status though, they don't have a competitive advantage in innovation vs. Google or Apple. From a strategic point of view then, I think what you're suggesting generally is right on point. They need to take advantage of their monopoly status in emerging spaces. That means a) employ the residuals that come with being a monopoly (like having an extremely powerful legal team). Their problem with mobile – to me – is their most valuable software has not really been ported (and probably couldn't be) given the current power of mobile phones. So, b) they need to try to get a respectable footing in the space, and wait it out before they can realize better integration.

So, anyway, your speculations regarding the HTC move make a lot of sense to me.
http://www.benjamintseng.com/ Ben

Always good to hear your opinion, Garvin.

I have been swayed by your's and Gagan's point that today, iPhone is the “smartphone standard” and that the “to buy or not to buy an iPhone” is probably a major binary choice — I am not convinced, however, that this will hold true for long. Of course, I have an almost irrational attachment to Google/Android and the power of a horizontal platform (subject for another post), so that may be a little bit too much of my bias speaking .

As for the view on Microsoft, while I agree in principle with what you're suggesting (Microsoft ought to rely heavily on its existing strong position and make sure it is “compliant with the rules of the game” before it makes more strategic integration plays), I think I disagree with the pretty negative picture of Microsoft's relevance and ability to innovate that you've painted. In the enterprise domain, they are still extremely potent (Azure, Windows Server) and I think they are very well-positioned in the game console space (Natal, XBox Live, XNA) and have a better shot than Blackberry/WebOS/Symbian at the mobile phone game. Their historic strength in building a strong developer community may have been eroded by the buzz from new platforms like Android, iPhone, and Facebook, but its still going strong — and with that, they can still out-innovate/out-integrate many other competitors. Now, you might have to take that at face value, but the point of this comment was not to start a debate about the virtues of Microsoft innovation but to ask you how you would actually evaluate how innovative a company is. I view this on a very technical basis (i.e., am I impressed with the technological challenges that the company has overcome), whereas your dimmer view on Microsoft suggests a different standard. What is that standard? And can I invest with it?
AndrewG

I'll chat with you about the innovation thing later, though you know way more than me, and I recognize my view is naive.

I wanted to quickly comment though, because I had never heard of Symbian and immediately thought of the Sybian. http://en.wikipedia.org/wiki/Sybian
AndrewG

Ben: Really excellent post. Your blog just gets better and better.

My view is that when Apple moves the iPhone to other carriers, it will become the standard, and there's nothing much that Microsoft (or Google) can do about it. The touch screen on the iPhone is better than on other devices, and it has much more mass appeal than the Droid or Nexus One. I strongly agree with Gagan that for the majority of people, the choice of phone basically comes down to a) are smartphones too expensive for me?, b) do I love Verizon so much that it overwhelms my love for the iPhone? If no to both, then buy iPhone. For gadget guys, the process is more nuanced.

Beyond network effects and path-dependence, my naive view is that Microsoft is still relevant only because there are huge barriers to entry to replicate a program like Excel (look at Google Docs), or the security features of Windows. In part because of their monopoly status though, they don't have a competitive advantage in innovation vs. Google or Apple. From a strategic point of view then, I think what you're suggesting generally is right on point. They need to take advantage of their monopoly status in emerging spaces. That means a) employ the residuals that come with being a monopoly (like having an extremely powerful legal team). Their problem with mobile – to me – is their most valuable software has not really been ported (and probably couldn't be) given the current power of mobile phones. So, b) they need to try to get a respectable footing in the space, and wait it out before they can realize better integration.

So, anyway, your speculations regarding the HTC move make a lot of sense to me.
http://www.benjamintseng.com/ Ben

Always good to hear your opinion, Garvin.

I have been swayed by your's and Gagan's point that today, iPhone is the “smartphone standard” and that the “to buy or not to buy an iPhone” is probably a major binary choice — I am not convinced, however, that this will hold true for long. Of course, I have an almost irrational attachment to Google/Android and the power of a horizontal platform (subject for another post), so that may be a little bit too much of my bias speaking .

As for the view on Microsoft, while I agree in principle with what you're suggesting (Microsoft ought to rely heavily on its existing strong position and make sure it is “compliant with the rules of the game” before it makes more strategic integration plays), I think I disagree with the pretty negative picture of Microsoft's relevance and ability to innovate that you've painted. In the enterprise domain, they are still extremely potent (Azure, Windows Server) and I think they are very well-positioned in the game console space (Natal, XBox Live, XNA) and have a better shot than Blackberry/WebOS/Symbian at the mobile phone game. Their historic strength in building a strong developer community may have been eroded by the buzz from new platforms like Android, iPhone, and Facebook, but its still going strong — and with that, they can still out-innovate/out-integrate many other competitors. Now, you might have to take that at face value, but the point of this comment was not to start a debate about the virtues of Microsoft innovation but to ask you how you would actually evaluate how innovative a company is. I view this on a very technical basis (i.e., am I impressed with the technological challenges that the company has overcome), whereas your dimmer view on Microsoft suggests a different standard. What is that standard? And can I invest with it?
AndrewG

I'll chat with you about the innovation thing later, though you know way more than me, and I recognize my view is naive.

I wanted to quickly comment though, because I had never heard of Symbian and immediately thought of the Sybian. http://en.wikipedia.org/wiki/Sybian

Microsoft surprise attack!

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