Microsoft's mobile trouble: can it buy its way out?

Microsoft recently announced that Oct. 22 is the ship date for its coveted Windows 7 OS. But last week as the tech world buzzed loudly about the unveiling of Apple's new iPhone 3G S and Palm Pre smartphone, it was easy to forget about the next version of Windows.

As more consumers and business users utilize their phones just as they would a PC for e-mail, Web surfing, instant messaging, purchases, and photo and music storage, the risk grows that Microsoft will become a non-player in the red-hot mobile space, say industry analysts. The company's Windows Mobile OS has struggled to make headway in the United States against heavy hitters including the iPhone, the BlackBerry and Google's Android OS.

Microsoft still dominates key markets such as browsers, client operating systems, PC/netbooks and desktop applications, but as consumer and enterprise technology evolves, Microsoft faces not only mobile trouble but also new challenges in markets such as search, Web applications and enterprise software.

MS Vulnerable on All Fronts

In search, Microsoft's market share has been stuck at less than 10 percent for years. New "decision engine" Bing is already growing Microsoft's search share, but the fact remains that Google is a force in search with 64 percent market share, according to comScore's latest search rankings.

Even in the office application space, where Microsoft Office is the clear leader, the company is losing consumers to cheap or free alternatives such as Google Docs, OpenOffice or IBM's Lotus Symphony. How soon will it be before these consumers start requesting these products at work? For its part, Microsoft has promised a Web-based version of Office in 2010.

Microsoft also faces a possible push into the enterprise by Apple with its new iPhone 3GS and the upcoming OS Snow Leopard that will support Exchange for the first time. Another concern is more prevalent use of Google Apps at businesses where workers can now access Gmail through an Outlook client.

But ultimately its the mobile market that stands out as the biggest danger zone for Microsoft, say industry analysts.

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Still No Answer to the iPhone

"Microsoft is certainly at risk of getting shut out of the mobile market," says Matt Rosoff, analyst at independent research firm Directions on Microsoft.

"After more than two years, it still has no answer to the iPhone, and has allowed a thriving ecosystem of third-party applications to grow up around Apple's platform. Microsoft succeeds when it wins platform wars, and here it's losing."

Rosoff adds that the perception of Microsoft in the mobile space is so bad that it's not even mentioned in most surveys of the smartphone business, despite having almost 15 percent market share.

"Palm and Google, both of which are minor mobile players, get far more press and respect than Microsoft," he says.

If Microsoft were to make a big mobile acquisition, Rosoff says that RIM (Research in Motion) is the most likely candidate because, "it would be the quickest way for Microsoft to increase its mobile market share and get more mobile hardware and software expertise."

Mobile a Tough Market to Buy Into

Veteran tech analyst Roger Kay, president of research firm Endpoint Technologies, downplays the power of the smartphone market and the need for Microsoft to make an acquisition.

"The phone market is bigger, but almost 300 million PCs will ship in 2010. That's no market to sneeze at," he says. "Content creation is largely going to be done on PCs, even if phones are the place for content consumption."

Kay adds that Microsoft will have trouble buying its way into the mobile phone business. "It can't buy a carrier - they're too big. It won't buy an operating system because it already has one. Buying applications is not really worth the trouble if you don't have the platform, and Microsoft is all about platform."

Microsoft's best chance in mobile, says Kay, is to reduce Windows so it can run well on phones, much like Apple did with Mac OS X. "Then Microsoft could leverage that position by connecting to the existing Windows ecosystem," he says.

Major Acquisition a Last Resort

Industry analyst Rob Enderle, president of tech consulting firm the Enderle Group, believes that small purchases for specific technologies will serve Microsoft well in mobile or any other market. A large-scale acquisition such as the much-discussed-but-never-closed deal to buy Yahoo, he says, will look desperate.

"Look for point technology purchases from Microsoft if they are doing their homework right," says Enderle. "A big acquisition would indicate a 'Hail Mary' play. That's why most didnt think Yahoo was a good idea."

Rosoff agrees that Microsoft is not likely to make a major acquisition to assuage its struggles in various markets, adding that Microsoft is probably not convinced yet that the threat from netbooks and mobile devices is real enough to warrant a major move.

"Microsoft may believe that Windows 7 will dominate on netbooks and that the mobile market will continue to be fragmented with no chance of a competitor moving upstream," say Rosoff.

Rosoff envisions a smartphone/netbook hybrid as the computer of the future. If such a market grows and starts to cannibalize the consumer PC market, he says, Microsoft's margins on Windows are likely to decline and a major acquisition will become more of a possibility.

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