Sample Reports

Windows Phone 7, the next generation of Microsoft's smartphone platform, became available to North American AT&T and T-Mobile customers in Nov. 2010 on devices made by Samsung and HTC (The platform was released in other worldwide markets in Oct. 2010.) Phone 7 introduces a new user interface, more restrictive hardware specifications, and an application development platform different from Microsoft's past smartphone efforts. The new platform could help Microsoft regain the smartphone market share it has lost to competitors Apple and Google, but supply problems and expensive contract renewal requirements could deter handset sales in the short term.

Marketing Campaign Spares No Expense

Microsoft has been in the smartphone business for almost a decade; the first smartphones based on Microsoft's Windows CE OS shipped in 2002. The last significant update to the platform—then called Windows Mobile—came in 2005, when Microsoft released Windows Mobile 5.0, based on the Windows CE 5.0 kernel. The version before Phone 7 was Windows Mobile 6.5, a minor update released in Oct. 2009.

Smartphones have become popular in large part because of the iPhone, which introduced an easy-to-use touch screen and icon-based interface. As iPhone sales took off, Research In Motion (RIM) updated its BlackBerry platform with consumer-oriented enhancements, and other competitors got into the game with similar touch-enabled platforms such as Google's Android and Palm's WebOS. Microsoft, on the other hand, released only minor updates to Windows Mobile, and important Windows Mobile partners, including HTC and Motorola, abandoned the platform or embraced additional platforms, such as Android.

Consequently, as the overall smartphone market grew, Microsoft lost ground. According to IDC, as of Sept. 2010 Windows Mobile stands at a distant fifth behind (in order of market share) Nokia's Symbian, RIM's Blackberry, Google's Android, and Apple's iOS in the worldwide smartphone OS market. According to ComScore, as of Sept. 2010 Windows Mobile is fourth behind (in order of market share) BlackBerry, iOS, and Android in the U.S. market. (Symbian has a much smaller share in the United States than elsewhere.) Android has grown at the fastest pace in recent quarters, equaling if not exceeding the market share of iOS.

Microsoft is expected to spend as much as US$500 million to market the Phone 7 platform and create awareness for the new devices using a theme of improved user etiquette. Ads emphasize how people lose touch with their surroundings and become less sociable while trying to find information on the competition's smartphones, whereas Phone 7 presents sufficient information at a glance.

Carriers, Models Scarce for Now

At the time of the North American Phone 7 launch, AT&T offered one phone model from Samsung and another from HTC, and T-Mobile offered a single model from HTC. (For an illustration of the available phones, see the illustration "First Windows Phone 7 Phones".) Carriers Sprint and Verizon are expected to offer Phone 7 handsets sometime in 2011, and additional phones are expected from makers such as Dell, Hewlett-Packard, LG, Sony Ericsson, and Toshiba.

The limited numbers of carriers and phone models could hinder Phone 7's competition with Android, which is available on many phones across all major U.S. carriers. However, Apple has captured a large share of the market by offering a single model at a time exclusively with AT&T.

Apps, Developers, Ads Could Be Key

Phone 7 users can browse, purchase, and download applications in the Marketplace hub, which initially offers about 1,000 choices including games and utilities. Since Apple launched the iPhone App Store in 2008, easy access to a large catalog of applications (many free, driven by ad revenue) has attracted consumers to the iPhone. The App Store now offers over 200,000 applications. Similarly, Google's Android Marketplace entices customers with more than 100,000 entries.

Although the Phone 7 Marketplace starts out with a small fraction of the number of applications available on the iPhone and Android platforms, Microsoft stresses the quality of those applications. To make applications available to Phone 7 users, developers must join the Windows Phone 7 development program, which costs US$99 per year, and then submit applications to Microsoft for certification. Microsoft will inspect the application for technical compliance—for example, it will use automated tools to inspect the .NET Intermediate Language code generated by the application to ensure that it won't interfere with other applications or services on the phone—as well as for content.

Phone 7 application developers can earn additional revenue by letting advertisers place commercial messages in their applications, a strategy also used on the iPhone and Android platforms. Advertisers bid for placement in applications through a real-time mobile ad exchange system. Revenue is calculated based on impressions (not clicks), and developers keep 70% of all revenue generated through their applications. Initially, only developers in the United States are allowed to participate, but international expansion is expected in 2011. The opportunity to earn advertising revenue could attract developers to the Phone 7 platform and help the Marketplace grow quickly.

Troubles Out of the Gate

Inventory shortages have hindered the launch of Phone 7 around the world. Initial supplies have been minimal, and many retailers have quickly sold out. The lack of product availability could hurt Microsoft's chances to make an impact on the market in the critical holiday season.

The high cost and contractual obligations of purchasing a new Phone 7 device may also discourage potential customers. Pricing for a handset in the United States can be as high as US$500, unless a customer signs a two-year contract with a carrier to reduce the price to US$200. However, customers who are currently committed to a contract may not have the option to renew and realize handset savings if not enough time has passed since signing their existing contracts.

Resources

Microsoft's Windows Phone 7 strategy is discussed in "Windows Phone 7 Series Resets Mobile Strategy" on page 3 of the Apr. 2010 Update.

The Windows Phone 7 Advertising SDK is discussed in "Advertising SDK for Phone 7 Applications" on page 14 of the Nov. 2010 Update.

Windows Phone 7 models and specifications can be viewed at www.microsoft.com/windowsphone/en-us/buy/7/phones.aspx.

The App Hub for Windows Phone 7 developers, which includes links to download free tools to begin developing for Phone 7, is at create.msdn.com.