|Software King in Odd Role With Cell-Phone Makers|
By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
Two years ago, Microsoft Corp. Chairman Bill Gates got mad during a phone conversation with Jorma Ollila, chief executive of Finnish cell phone maker Nokia Corp. According to a top Microsoft executive who overheard the call, Mr. Gates "was yelling so loud you could probably hear him in Finland -- without a phone." The problem? Mr. Ollila had inked a deal with Microsoft rivals to develop a "smart" mobile phone.
Mr. Gates, whose angry e-mail about the encounter was unearthed at the company's antitrust trial, was irked again a few months later. At a meeting at Microsoft headquarters in Redmond, Wash., a colleague of Mr. Ollila's indicated that the glory days of the personal computer could be over. A Microsoft executive recalls an upset Mr. Gates fuming, "'If you think the PC is dead, then why did you come here?"
Nokia declines to comment on the exchange; Microsoft points out that it is natural for Mr. Gates to defend the added power and functionality offered by PCs.
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There are other reasons why Mr. Gates got so hot under the collar. As wireless computing explodes, Microsoft needs to step up its progress in the market for high-tech phones and other pocket computing gizmos. But to win in the wireless world, Microsoft will have to make concessions -- more concessions than it is accustomed to.
For one thing, Microsoft doesn't have the same kind of leverage with phone makers and wireless service providers as it does with the PC industry. Some of the company's new gambits, revealed over the past few months and highlighted at the company's recent Internet strategy session, include developing special Web software dubbed a "microbrowser" to run on other companies' phone operating systems, the underlying software that makes the phones work. That's a far cry from the world of desktop computers, where Microsoft dominates the PC operating system market.
Snubbed by Nokia, the company is working with a smaller but still important cell-phone player, Korea's Samsung Electronics Co., to develop smart-phone software -- a project code-named "Stinger" -- that will allow users to wirelessly surf the Web, retrieve e-mail and even compose short documents on their phones. However, Stinger is based in part on Microsoft's Windows CE software, a product used in handheld computers and TV set-top boxes that Microsoft has had a tough time persuading other phone makers to use.
Microsoft's biggest chance at success may be its quiet efforts to exploit links between cell-phone carriers and back-end software it is developing that will help manage e-mail and other services. Carriers may take an interest in that still-unreleased software, code-named Airstream and due out in some form later this year, as more of their customers want to use their cell phones to connect to their personal or corporate e-mail accounts -- often powered by Microsoft products. Microsoft already has agreements to work on other types of back-end systems with British Telecom PLC and the big Japanese wireless carrier NTT DoCoMo Inc.
Overall, Microsoft is hedging its bets and refining its tactics. With wireless computers exploding, and interest in PC software waning, it doesn't have much choice, analysts say.
"I think it's a smart move," says Ken Dulaney, an analyst with Gartner, the Stamford, Conn., research firm formerly called Gartner Group. "Somebody up top [in Microsoft] has realized that they may have lost the battle for the phone operating system," so the company is experimenting with other tactics. Still, he points out, "They haven't scored a win yet."
Microsoft certainly has some work ahead of it, particularly now that it has made beaming data to wireless devices a centerpiece of its new Internet-software strategy. One continuing challenge, and a core to its new alliance with Samsung, is how to adapt its old Windows CE operating system to tiny devices. Windows CE was long considered too data-intensive and clunky for non-PC machines, and Microsoft has only recently refined it enough so that it is a credible competitor for the operating system made by arch-rival Palm Inc. A version of Windows CE now powers the handheld PocketPC devices, made by vendors such as Compaq Computer Corp. and Hewlett-Packard Co.
"The real challenge will be, can they tailor it toward a cell phone, where the demands are even greater," says Mark Zohar, an analyst with Forrester Research Inc., a Cambridge, Mass., technology forecasting firm.
How critical is the smart-phone market for Microsoft? According to Gartner, there will be a staggering 700 million cell phones sold world-wide in 2003, about 80% of them offering connections to the Internet. By contrast, consumers will buy only about 30 million larger "personal digital assistants," such as PocketPCs or Palm products, in that year.
In fact, Microsoft's top wireless executive, Harel Kodesh, left the company earlier this year after a disagreement with Mr. Gates over whether Microsoft should use Windows CE in smart phones rather than build entirely new software, people familiar with the matter say. Mr. Kodesh wanted to have a new group of software developers start from scratch, since he felt the existing software might not be best for some small phones, these people say. Phone manufacturers also needed more say in how the software would work, he believed.
A Web of Wireless Offerings
The main weapons in Microsoft's wireless arsenal:
MSN Mobile: Lets users browse services like restaurant listings, Hotmail. weather and travel itineraries over phones. Pings them with alerts on selected data. Browsable version runs on any Web-enabled phone.
Mobile Explorer: 'Microbrowser' that can run on Windows CE or other operating systems. Samsung, Ericsson, Sony and France's Benefon will use in 'feature' phones, which transmit data only when connected to a network.
'Stinger' phone: Souped up 'smart phone' using Microsoft software based on Windows CE. Can be used on- or offline, and offers wireless Web browsing, e-mail and calendar services. Samsung to roll out phone next year.
PocketPC: Rival to Palm's system for handheld organizers, unveiled by Microsoft in April. Uses Windows CE. PocketPC devices manufactured by Compaq. Hewlett-Packard, Casio and Symbol Technologies.
'Airstream' back-end software: A new software platform, now being developed, that Microsoft will try to sell to cell-phone carriers so customers can better access e-mail and other data services by phone. Will tie into Microsoft's Exchange servers.
Ultimately, Mr. Gates prevailed and Mr. Kodesh resigned. "It was clear that my management and I saw things differently," Mr. Kodesh said in an interview, adding that he still thinks Microsoft can succeed in wireless devices. Paul Gross, Microsoft's senior vice president in charge of the company's collaboration and mobility group, declined to comment on Mr. Kodesh's departure.
Benjamin Waldman, who essentially replaced Mr. Kodesh as the vice president of Microsoft's mobile devices division, says CE "provides a great foundation" for Microsoft's PocketPC products and its phone software. Microsoft has finally developed new versions of the operating system that use less power and require less memory, making them "optimized" for wireless devices, he says.
Not everyone is convinced. Big Swedish phone maker Telefon AB L.M. Ericsson, which has a joint venture with Microsoft to develop mobile e-mail and other services, still prefers competing operating systems, such as the EPOC system being developed through the Symbian PLC consortium. That group includes Ericsson as well as powerhouses Nokia and Motorola Inc.
"We see Symbian and EPOC as a system that is superior to Windows CE," says Ericsson spokeswoman Pia Gideon. Another company executive adds: "Symbian and EPOC come from the right part of the world -- the mobile world."
Perhaps to fight attitudes like that, Microsoft is simultaneously pitching a microbrowser called Mobile Explorer, which can run on top of other types of operating systems, including EPOC. For Samsung, Ericsson and other companies now working with Microsoft, it will work on less-powerful "feature phones," which are best suited to functions such as sending short e-mail messages and checking electronic calendars. Sony Corp. has already started shipping such phones in Europe.
Microsoft's Mr. Gross said the company's embrace of an operating-system-agnostic phone browser isn't an admission that Windows CE won't dominate the next generation of cell phones. Instead, Mobile Explorer simply "gives us more business opportunity," particularly in markets where "we don't have the leading OS," or operating system, he said. "Largely, the monetization of the business opportunity is much more through the servers [on the back end] anyway."
Analysts say Microsoft's biggest chance to win in wireless lies in providing back-end software to cell-phone carriers that will allow mobile-phone users to easily link up with Microsoft-powered e-mail services. Microsoft already boasts more than 67 million users of its free Hotmail e-mail service and about 40 million people with mailboxes run by the company's Exchange servers, Mr. Waldman points out. That gives Microsoft leverage when it tries to sell software to phone carriers.
While Microsoft's e-mail software might work on other companies' computer-server software, "we can make our things work better together," Mr. Waldman explains. "That means we can provide an end-to-end solution." It's similar to Microsoft's PC strategy, which seeks to tie together software such as Windows and Outlook with back-end computers, particularly those owned by big businesses. Of course, another type of "bundling" -- specifically, Microsoft's tying of its Web browser with Windows -- was what got the company in trouble with the U.S. Justice Department and sparked the harsh breakup ruling handed down last month. Microsoft is appealing that decision.
In the meantime, Microsoft is astutely focusing on the behind-the-scenes mechanics of wireless computing, especially e-mail. "If you become the carrier of e-mail across the world, you become like the global post office," says Gartner's Mr. Dulaney. Compared to that, he adds, Microsoft "probably thinks that fighting Symbian is small potatoes."
-- Almar Latour contributed to this story.
Write to Rebecca Buckman at email@example.com