Will Microsoft Risk Manufacturing a Smartphone?

For a long time, Microsoft has been the company that depends on manufacturing partners in order to spread the Windows operating system. Until recently, this was also true for their mobile efforts as they partnered with several companies like HTC, Nokia, and Samsung in order to showcase their Windows Mobile CE and Windows Phone platforms. When Microsoft then decided to build its own Windows 8 tablet, the Surface, questions arose about whether they would also build their own smartphone one day. But would Microsoft risk their strong partnership ties to enter the market on their own?

According to DigiTime, a Taiwanese news site, the answer is a resounding yes. DigiTimes sources report that both Microsoft and Amazon have put in orders with Foxconn International Holdings, the Chinese gadget manufacturer that also builds Apple's iPhone. The orders, DigiTimes reports, are for small amounts of their own smartphones to be sent out in middle of next year.

However, it must be noted that DigiTimes does not have the best track record for smartphone rumors. There have been several unsubstantiated rumors in the past, especially regarding new devices like the iPhone or iPad. However, there are many other reasons to not disregard this rumor so quickly.

Although it is only speculation right now, the idea that Microsoft could create their own smartphone is not as wild as some would imagine. For example, there were a lot of questions about Microsoft producing their own tablet and yet they did - even if it was against the industry's better judgment. Also, if DigiTimes is to be trusted, Microsoft did not put in a large order. This may mean that Microsoft is trying to avoid high risks right now by merely dipping a toe in the smartphone manufacturing pool rather than diving in head first.

Chetan Sharma, a mobile analyst, says that if Microsoft creates its own smartphone then it may maintain pressure on its manufacturing partners to continue performing at high levels. Moreover, this may hedge its bets by opening a pathway for possible vertical integration in the future.

In an email to ReadWrite, Sharma explains, "if you connect the dots, it is not inconceivable that Microsoft will come out with a smartphone that A) forces OEMs to come out with their best in rapid cycles and B) keeps them in the game if they have to resort to a vertical strategy at some point in the future." He continues by saying that "it is the same dilemma that Google faces. The Nexus line of products is to keep the pressure on the OEM partners as well as prepare for a possible vertical strategy down the road."

When it comes to building its own devices, Microsoft is not a new player in the game. It has been the manufacturer of the famed Xbox video game console and has tried its hand at mobile devices before, with the unfortunate Zune and Kin phones.

If Microsoft decides to try a limited-run in a Windows Phone device it would more than likely follow the same path that Google took with its Nexus devices, which are known for their leading Android tablets and smartphones created to be the benchmark by which other manufacturers measure their devices. The difference between the Nexus devices and Microsoft, regarding making a model smartphone, is that manufacturing partners built the devices for Google. For example, the Nexus 4 smartphone is manufactured by LG, the Nexus 7 is by Asus, and the Nexus 10 is built by Samsung.

The motivation behind Microsoft's desire to build their own mobile devices comes from Cupertino. The seemingly unstoppable force of the Apple iPhone has sparked dreams for many mobile manufacturing companies, giving them hopes of being able to successfully integrate vertically and enjoy the benefits.

According to Sharma, "Microsoft (and Google) have also seen the vertical model of Apple succeed beyond their imagination and view it with envy."

The issue, however, is that Microsoft's current mobile strategy is not entirely solid. The new Windows Phone 8 provokes loyalty from users and is viewed as a creative alternative to the iOS and Android and yet its sales are not very high. This is despite the comment by Microsoft CEO Steve Ballmer that said the Windows Phone is selling four times better than this time last year. Due to the fact that Microsoft sold a mere 1.7 million Windows Phones in the third quarter of 2011, four times more than that is still not a big claim to fame when compared to iOS or Android.

Nokia and HTC are Microsoft's two main partners for the launch of the Windows Phone 8. In light of Microsoft's hefty investment in Nokia to make them the flag bearer for the Windows Phone, Microsoft should be doing all in their power to keep Nokia afloat until they can get Nokia on their own feet again from their market loss to Samsung and low earnings last quarter.

Jack Gold, principle analyst at J. Gold Associates, explains the situation through an email exchange: "They do need to do something to kick start Windows Phone adoption, as it's still a meager part of the market. But if they produce a phone, it will hit Nokia in particular really hard. Nokia is struggling to regain market share, and anything Microsoft would take away from them would be very painful. So I think Microsoft will tread carefully here, as it would be a balancing act between accelerating the market, and hurting your vendors (particularly Nokia but also HTC)."

In terms of manufacturing partners, however, Microsoft's position is much more perilous than Google's. Aside from withdrawing the Android open source license and combining all of its manufacturing to Motorola, there is not much Google is able to do that could hurt their partners. On the other hand, Microsoft could damage Nokia tremendously by building their own smartphone. Presently, Windows Phone sales are not enough to sufficiently support the ecosystem. Thus, taking any of these sales from Nokia may end up being the last straw for the company.

As opposed to the Surface tablet, which did not have a set market or compete with any manufacturing partners prior to the release, the Windows Phone is already established with its manufacturing partners. Moreover, these partners are also trying to claim their portion of the mobile market share. Since Nokia's entire business is wrapped around the Windows Phone, the potential for damage from a Microsoft-built smartphone is much greater than when the Surface was created.

The original question still remains then. Should Microsoft take the risk of entering the smartphone manufacturing realm, even if it means putting Nokia under? Or should they limit the HTC's fading potential? Finally, does the ambiguous promise of a flagship Windows Phone or absolute vertical integration completely outweigh the other factors? Only time will tell. (RP) Link