Microsoft's billion dollar bonfire

Microsoft executives told Goldberg during a recent visit to company headquarters that the company, carriers, and manufacturing partners, would spend “billions” of dollars in the first year on marketing and development of Windows Phone 7. Another source estimated a $1 billion price tag for the launch, with half of it going to marketing.

via AppleInsider | Microsoft to spend over $500m to catch up to iPhone, Android.

Note the scale of spending here.  The number quoted is twice Apple’s yearly ad budget, for all its products.

$500 million is roughly the equivalent of Apple’s entire advertising budget for its 2009 fiscal year. In its 2009 Form 10-K filing to the SEC, the Cupertino, Calif., company listed $501 million in advertising expenses. Microsoft’s fiscal 2009 advertising budget was $1.4 billion.

But beside the unrepentant destruction of Microsoft’s shareholder wealth, one other thing jumps out at me: why are the operators and vendors going along with this?

Fragmentation increases the cost of development, marketing, operations and hinders the creation of cohesive ecosystems.

Most companies are very aggressive in consolidating around internal platforms and standards. Supporting R&D teams and marketing teams around each platform is costly and dilutive to one’s brand.

With hundreds of Android devices and RIM and Apple increasing distribution, why would operators be willing to spend hundreds on a venture to promote a new platform? This decision is even more puzzling when realizing that the vendor of the new platform left nothing but business model carcasses behind the last time they got involved in the industry.

In addition the positioning of this product is suspiciously awkward. One could argue that as a vendor or operator, having an unaddressed or underserved market (say, business users) might mean this platform could expand the distribution of your product or service. But Windows Phone is being positioned as a consumer brand and that’s a crowded space where every other platform is also targeted. See the survey data below (unconfirmed source: US Army)

So again, why would operators and licensees spend hundreds of millions to introduce yet another platform in the market?

Maybe they are just taking Microsoft for a ride.

  • Priit

    Hanset makers finance more than half of carriers ad budgets, so it is carriers primary interest to have many makers with deep pocekts to play against each others and extract best financing for the next campaign. So, carriers do not spend a dime to promote W7 and they do not spend much to promote Android either. Maybe Verizon spent something, but soon enough gamed HTC against Motorola and probably cut most of the ad budget with that move.

  • Because operators fear the idea that Google, Apple, or any other "upstart" tech company should have significant impact on their ability to control the mobile voice/data markets?

    They've seen how Apple was able to subvert their control over what software sits on the phone (which they all regard as a huge potential future revenue stream). They've managed to make Google step back into line after the Nexus One fiasco, but they're keen to ensure that no one vendor ends up with enough of a segment to effectively control the platform. So a big, strong competitor coming in and keeping Apple/Google/RIM in line is beneficial to them.

    To put it another way: They want to continue the idea that people buy "a Verizon phone" or an "AT&T phone", rather than "an Android phone" (or whatever).

    • I believe you’re right.

    • Priit

      Well, no. They don't fear handset makers, they just don't wont to advertise other brands, brands that their competitors sell too. Carriers business is to sell contracts and the best way to do that is to offer something (better) that the other carriers don't have. Nexus One fiasco comes from that fact, you have no interest whatsover to advertise phone your competitors also have.

      • ChuckO

        The Nexus was a marketing failure for Google, right? There was never an incentive for a carrier to market it. You were supposed to buy it without carrier support. It was sold like the iPhone was originally: full price. It seems like Google thought it would sell itself and that didn't turn out to be the case.

        Google is getting to look more and more like Nazi Germany fighting on too many fronts: Microsoft, Apple, Facebook. That's a lot of windmills to be tilting at.

      • Priit

        Actually it was kind of marketing failure. I quess the engineers thought that if we are cool and we build something cool, then it will sell. The idea of selling unlocked device at full price is in itself not failure at all, negotiate with carriers, pick up the check for their advertising campaigns and the carriers are more than happy (especially in the US) to sell full price contracts without the need of subsidizing the phone.

      • The Nexus One was a strategic, conceptual and understanding of the market failure. Google was not the first to field a phone through the online channel. They were arrogant enough to think that their brand could pull off what was known to be impossible: sell phones outside the operator channel.

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  • "Why would operators and licensees spend hundreds of millions to introduce yet another platform in the market?"

    Could it be for the very same reason that Dell refused to carry AMD chips for all those years – the "Tactical and Strategic Fund" which they used to smooth their revenue figures for all those years.

    On top of that, it's in the best interest of the operators to maintain a fragmented market. The more homogenous it is, the more they will be seen as just the pipe for all those zeroes and ones.

    • "it’s in the best interest of the operators to maintain a fragmented market"

      If this is the reason then we can again confirm that a single mobile platform "dominating" the industry is impossible.

      • ChuckO

        We won't know that until the iPhone is available on all America's carriers. Imagine with a couple more years of "Facetime" caliber innovation and the iPhone available everywhere what effect that could have.

        As long as they can keep the carriers off the iPhone but the iPhone on the carriers.

        Patience, patience, patience.

  • Android is only strongly established in a small number of countries, so many carriers still want an alternative to Apple and RIM (other than Symbian that is).

    • That may be but I'm willing to bet that the spending will be in the US where Android is firmly established. Microsoft is spending big to gain mindshare with a key group of influencers and with developers as well.

  • Gandhi

    Microsoft never had good marketing. They always come off as desperate and fumbling. Microsoft is successful in spite of all its marketing and R&D efforts.

    • ChuckO

      They are only successful in selling Windows, Office really. The xBox has sold a lot but may not be profitable yet and if it is is very small, Windows Mobile was never profitable and based on this article won't be anytime soon. The web has cost MS a fortune with no reason that will change anytime soon.

  • Microsoft should not start this big because they haven't proven anything yet in the smarphone market. Rember Kin? It just failed and the good thing is that they learned enough lessons with it. They should start something small with preparations on the back if it fires good in the market. remember that android is in the momentum and iPhone is still on top.

  • Iphoned

    No one wants to be left behind. And you can't discount the probability of Microsoft musseling their way into major smartphone marketshare. So the handset makers will follow, which in itself can create success for Microsoft in this space.

    • Gandhi

      They tried that with the Zune, and Plays4Sure before that. Didn't work.
      Or look at Kin.

      • Tom Ross

        It somewhat depends on product quality as well. PlaysForSure never played for sure, and Kin looked mindnumbingly ugly and low-usability right from the start. By comparison, WinPhone 7 looks quite usable and, very important, it's more differentiated from iOS than Android, Bada/TouchWiz, Sense or WebOS. Do a little marketing on its unique character, and consumers will recognize it.

      • Gandhi

        And the Zune? I think Ballmer's "squirting" comment did more to hurt Zune among geeks than any amount of marketing helped it.

    • Gandhi

      "Microsoft musseling their way into major smartphone marketshare"

      And market share means nothing it it does not make you any money. If the series of articles at Asymco over the last three weeks is anything to go by, marketshare should not be the long term goal for a platform looking for viability. Look at Android usage on the BBC, for example.

      • Tom

        Your FOI response from the BBC gave stunning replys: for July, 1,900 android users watched 1,800 hours maximum on flash. But 5,249,000 iOS users watched 6,400,00 programmes. There's differentiation for ya!

      • Tom

        Let me get this right: 240,000 users on iOS watched 5,240,000 programs. Compared to 1,800 users on android watched 1,900 programs. The 1:1 ratio of programs to users on android suggests frustration, while the 22:1 programs to users on iOS suggests functionality. It just works.

  • Tom Ross

    That budget is 5 times the budget Verizon had for their Droid campaign last year which did the same thing for Android Microsoft is looking for now.

  • poru

    Is Seinfeld available this time around? 😉

    That was a good way to piss away a few million $$…

    Honestly, what was the last really good MS marketing campaign for any of its products?

  • Walt French

    “With hundreds of Android devices and RIM and Apple increasing distribution, why would operators be willing to spend hundreds on a venture to promote a new platform?”

    Methinks this question presumes that handset makers are anywhere close to the top of the cellphone foodchain. With the obvious exception of Apple and RIM, the carriers easily play off handset manufacturers against one another, and their profit margins are low, as economic theory of a very competitive market would predict. The carriers, holding 90% of the US cellphone revenues among 4 firms, are able to use their promotional plans and dictated feature sets to keep the manufacturers barefoot & pregnant.

    So of course, VerizAttSprTMo are happy to have Microsoft promotional dollars to continue the little game. Microsoft might just as well write their checks directly to the carriers and cut out the middlemen.

    What little say the manufacturers actually have might reasonably hedge their bets on issues like the Apple or Oracle patent cases. If both these cases were to succeed in the next year, HTC would be left without an OS unless they license Windows. Of course they will, even if they assess the probability as low as 5%.

    What astonishes me is how naïve Microsoft looks in all this. If they want to sell smartphones in the 21st century, I think they'll need to partner with firms that have some real clout, either in branding or direct customer ownership. Maybe somebody like Sprint, at a puny $12 billion. Or sign deals with the Fortune 1000 that every MS phone gets free access to MS Entourage + MS Cloud Docs or whatever, free even of data costs.

    But it seems to me that spending a billion dollars a year to remind people that you're an also-ran player would be the most wasteful use possible of that money.

    • I asked the question rhetorically and your answer is precisely what I would answer myself. The answer applies to most markets, not just the US.

      The implications of this are, however, that talk of dominance by one platform over the industry is nonsense. I've argued before that the Android (or iPhone) will never achieve monopoly status in telecom and that there is an implicit open door policy to both Microsoft and Nokia designed to maintain a balanced platform portfolio for any operator.

      Ironically, the past performance of Windows Mobile is the best indicator of future performance of Android and Android's performance in the market today is the best indicator of future performance of Windows Phone.

      • Priit

        I think you are wrong of concentrating on platforms. Carriers play handset makers against eachothers, not platforms. It's quite imaginable for example Verizon having Droids and Droids only on shelves one day, but manufactured by 3…5 different companies.

  • ChuckO

    Why is Microsoft going with a partner strategy here? Why aren't they building this themselves if they're so confidant? Didn't their adventures in the MP3 player market teach them anything?

    • This is a very good question. When Microsoft went with Zune and Xbox, they decided that those markets required an integrated HW+SW+Service model thus breaking their modular (horizontal) Windows PC tradition. When they look at the phone market however they persisted with modularity. This in spite of years of failure for modular solutions (Windows Mobile, Symbian, Palm Source).

      I speculate that Android, which took a symmetric approach to Windows Mobile, may have influenced Microsoft to stay the course. By watching Google adopt a similar model to their own, Microsoft may have felt vindication and justified their doubling down with Windows Phone.

      Also possibly they consider the long term future of phones to be much more like the PC (i.e. modular) and therefore they are willing to wait for that future even though their solutions are uncompetitive in the short term. In other words, seeing their success as a matter of timing.

      Lastly, they probably also think that the market is so big that a "Zune phone" could never address it with significant volumes.

      • Yowsers

        There are, of course, simply "inertia" on the one hand, and satisfying domestic (internal) polictics, too.

        The inertia would be institutional inertia. It's a mere 3 years since MSFT was an incumbent with mobile market share and was snickering at AAPL. My guess is many of those same managers and workers remain in place or near about. They'll do what they've always done.

        And instead of a clear-eyed, dispassionate assessment of the market guiding their decisions, the internal politics and fiefdoms of Redmond probably still hold stronger influence on it.

        I am thinking of something I read about CIA analysts many years ago. The analysts found that explaining the actions and motivations of foreign states was perplexing when viewed in the wider context of things, but made sense if understood that many decisions and positions were made for satisfying a domestic audience first. Thereafter they worked outward — the effect on neighboring states and allies counted next, then on enemies, then on the world at large — each level having decreasing influence the further out from center they went.

        Within companies, especially MSFT, there's likely an internal political influence that carries the most weight in their decision making.

  • I suspect that, in the minds of the operators, it breaks down something like this:

      • A monopoly (say iPhone only) gives the operator no leverage.
      • A oligopoly (iPhone, RIM and Android) is better, but still leaves too much pricing power with the platform providers.
      • …but perhaps at 5+ platform providers (add Windows Phone and a few others), operators think those platforms will be rendered as commodities, where each provider could be effectively played one off against the other in order to seriously drive down pricing.

    In other words, a big investment in promoting Windows Phone (as they did for Android) is a long-term play to ensure the market is commoditised. This approach worked for feature phones.

    As I have mentioned in previous comments, I think the current differential in smartphone platform quality will continue to drive customer share in only one or two directions, but that won't stop operators from trying to engineer a market share spread.

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