This article titled “Microsoft to spend billions on Windows Phone 7: what chance of payback?” was written by Charles Arthur, for guardian.co.uk on Wednesday 1st September 2010 11.20 Asia/Calcutta

While everyone has been focussing on Apple, RIM and Android phones, it’s been easy to overlook the company that has a lot at stake in the mobile market. (Chorus: Nokia!) No, not Nokia, which is still selling lots of phones (though we’ll come to quite what’s going on with Nokia in the near future).

No, we meant Microsoft. Remember them? And Windows Phone 7? It’s now moving towards the launch stage – which means advertising budgets, handset manufacturers, carriers, all having to be brought into line.

As the table (from Windows Phone 7 Central) shows [apologies for the overspill], the early players in this are the companies that have previously been Microsoft’s mobile BFFs. Though Dell has made very little impact in the smartphone market, HTC was (is?) the company which bought the most Windows Mobile licences, while Samsung and LG have been big WM licencees too. Notably absent from the list (so far) are HP, Sony Ericsson and Toshiba, who were among those mooted by Microsoft in February.)

But now let’s discuss the price. At Techcrunch Kim Cutler suggests the price of launching Windows Phone – in terms of marketing costs, payments to developers and handset makers – will be more than half a billion dollars. She quotes Jonathan Goldberg, a telecomms analyst at Deutsche Bank, who reckons Microsoft will spend 0m just on marketing the launch.

She has an interesting quote from him:

"This is make-or-break for them. They need to do whatever it takes to stay in the game," says Goldberg. "It’s still wide open. They don’t have to take share from Android or Apple, so long as they can attract enough consumers switching from feature phones."

The idea that in an expanding market it’s always OK just to take a niche is one that you’ll hear repeatedly from companies that are trying to catch up. (Of course Microsoft’s not saying this. But it’s the analysis being offered.) The reality though is that that is never the way to make sufficient impact on the market; it’s expensive and you’ll stay in a niche. Going back some time, I recall Ed Colligan, then chief executive of Handspring, saying it about the PDA market. Handspring couldn’t make any headway, though, and got bought by Palm.

Or it could be bigger:

"On a visit earlier this month to the company’s headquarters in Redmond, Goldberg says company executives told him that Microsoft, along with its carrier and manufacturing partners, would likely spend "billions" of dollars in the first year for marketing and development. Another source familiar with Microsoft’s manufacturer and carrier agreements says the company will spend billion on the launch, half on marketing and half on other development costs."

Eee-yikes. Billions of dollars so that you can catch up to get back to the place where you used to be, but aren’t because you competely took your eye off the mobile ball? For any company other than Microsoft, that would be scary. For Microsoft though, that’s just a cost of doing business, at least in the mobile market.

Mary Jo Foley meanwhile thinks that the cost is easily going to be north of a billion dollars:

"Think this through: Microsoft easily spent over a billion dollars over three years to develop and launch the now-defunct Kin phones, which were a tiny subset of its Windows Phone base. Microsoft spent an estimated 0 million to buy Danger; at least two to three years worth of salaries for the Pink team; however much it cost them to survey the tens of thousands of potential Kin customers/testers via "Project Muse"; and 0 million to write off the failed Kins.

"Windows Phone 7 is of far more importance to Microsoft than the Kin phones were. And Microsoft has been working on its Windows Mobile 6.x successor for two-plus years so far. We’ve heard from the Softies that they’ve reassigned many of their "best and brightest" to develop the Windows Phone 7 operating system, reference designs, user interface and developer ecosystem. So that’s two-plus years of salaries for thousands of Softies."

She concludes:

"I’d say it’s safe to say we’re easily at or over billion at this point. Microsoft made .5 billion in fiscal 2010. One of the company’s biggest black eyes at this point is its lack of a credible and coherent answer to the iPhone and Android. A billion dollars would be a small price to pay to achieve this. Do you agree?"

Actually, I don’t agree that Microsoft "made" .5bn in fiscal 2010; those were its revenues. Its profits for FY2010 were bn. And it’s sitting on a cash pile of bn. So it’s really not going to notice the odd billion going missing, especially in the market that so many think is so important for mobiles – smartphones.

Yes, you could certainly argue that all the momentum is with Android at the moment, the mobile OS platform which is selling more phones than Apple, and might soon overtake RIM. You could argue that that’s because the Android code is open-source, and hence costs "nothing" to use in a mobile handset.

But over at Business Insider, there’s a Microsoftie who has emailed them (anonymously) to suggest that the cost of incorporating Android into handsets is actually much greater than "free". As he puts it:

• Lawsuits over disputed Android IP have been costly for Android OEMs. (See Apple/HTC, as just one example.) Microsoft indemnifies OEMs who license Windows Phone 7 against IP issues with the product. That is, legal disputes over the IP in Windows Phone 7 directed at OEMs will be handled by Microsoft. This goes a long way toward controlling legal costs at the OEM level.

• Android’s laissez faire hardware landscape is a fragmented mess for device drivers. (For background, just like PCs, mobile devices need drivers for their various components—screen, GPS, WiFi, Bluetooth, 3G radio, accelerometer, etc.) Android OEMs have to put engineering resources into developing these drivers to get their devices working. The Windows Phone 7 "chassis strategy" allows devices to be created faster, saving significant engineering cost. It’s essentially plug and play, with device drivers authored by Microsoft.

• [At Microsoft] We’ve seen the delays due to Android OEMs having to sink engineering resources into each and every Android update. Some Android OEMs skip updates or stop updating their less popular devices. Because of the unique update architecture, Windows Phone 7 OEMs don’t need to roll their own updates based on the stock build. Costs are reduced significantly.

• Android OEMs need to pay for licenses for many must-have features that are standard in Windows Phone 7. For example, software to edit Office documents, audio/video codecs (see some costs here), or improved location services (for this, Moto licenses from Skyhook, just as Apple once did). Of course, all of these license fees add up.

As Cutler points out, "Even at per device, 100 million Windows 7 phones will have to ship before it recoups billion in marketing and engineering subsidies, not counting revenues from search advertising or its cut of app sales)."

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