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Windows Mobile OS
Microsoft is Catching Up

Microsoft has struggled for years to establish a foothold among smartphones with Windows Mobile, and it is finally showing some real progress. Slowly, but surely, Microsoft's Windows Mobile operating system (OS) is making inroads with consumers.

Positive Developments

Consider the following recent positive developments surrounding Windows Mobile:

Motorola expects to launch its Windows Mobile-powered Q model before year’s end
One-time rival, Palm, will ship the Treo 700w early next year with Windows Mobile 5.0
A growing number of manufacturers are shipping Windows Mobile products worldwide
Windows Mobile leads the U.S. smartphone OS market, according to the latest data from The NPD Group

And, a somewhat overlooked fact concerns an up-tick in the number of Windows Mobile OS-enabled smartphones shipped: the company says five million units were delivered worldwide in its 2005 fiscal year (July 2004 through June 2005).

To Microsoft skeptics, this may seem like a lot of bluster. They point to RIM’s larger installed base of 3.65 million worldwide, and Symbian’s 14.5 million devices shipped worldwide in the first half of this year alone. These are impressive numbers, to be sure.

But Microsoft’s gathering strength is hard to deny. The company has steadily marshaled its forces -- both internally and among external partners -- and the result is an improved product that is resonating with increasing numbers of customers, especially on Microsoft’s home turf in the U.S.

Challenges Remain

Nonetheless Microsoft, like others in the smartphone category, still faces some significant challenges, including the following:

The overall market is still relatively small -- smartphones account for less than three percent of all mobile phone shipments in the U.S.
Most consumers care little about the OS on their phones
Devices tend to be pricey: $200 and up
Widespread enterprise smartphone deployments have yet to materialize

Microsoft also faces challenges of its own. The company must compete against an entrenched number of loyal RIM BlackBerry users (now about 2.7 million in North America alone). In addition, Symbian-based devices have penetrated the mid-tier consumer segment. Finally, the wildcard Linux OS is gaining strength abroad and is poised to ride on forthcoming Motorola phones.

The Upside for Microsoft

Still there is an upside for Microsoft: The company can rely on momentum heading into 2006, since both Palm and Motorola are also pushing smartphone devices. In addition, other market factors favor Windows Mobile, including the following:

Palm OS is fading fast
Microsoft-centered IT departments are welcoming Windows Mobile
End-users are familiar with the Windows environment and user interface
More data-intensive corporate applications are entering the market, which should help drive new demand for Windows Mobile
There is increasingly wider deployment of faster data networks, like EV-DO and HSDPA, to enable greater uptake of mobile data applications
Legions of Windows developers are capable of taking advantage of a growing installed user base

There’s no secrecy surrounding what has powered Windows Mobile’s upward movement. The company clearly has had the cash to wait for the market to turn its way. It has also spent the last several years improving the OS, as CEO Steve Ballmer has made it a top corporate priority.

Microsoft has also gained from the introduction of faster chips available to power the expansive OS. Integration of phone and PDA functionality has improved, and the company has figured out some ways to attack the costs associated with rival products, especially RIM’s.

For now, the future looks bright for Microsoft’s Windows Mobile, but worthy rivals remain. The next two years will be pivotal for Microsoft to continue showing real market progress.

Barring a major mistake, it’s clear that Windows Mobile-powered phones will garner a respectable share of that market, no matter how big the market eventually grows. Microsoft is unlikely, however, to enjoy the 90 percent domination it has enjoyed in the PC market.

— Neil Strother, Research Director, Mobile Devices