It’s Too Late for Microsoft To Build Its Own Handset

Microsoft (s msft) should be making its own handsets, says Peter Bright of Ars Technica. Licensing an operating system in the smartphone space doesn’t earn much money, so I understand Bright’s point. But the window of opportunity for Microsoft to build its own phone closed down the minute it said it would license Windows Phone 7 to hardware partners. The time to make the break from licensing a mobile OS and start making hardware has passed Microsoft by – at least until the next time the company decides to reinvent its place in the smartphone market, and even then it would bring challenges.

Bright’s description of the financial aspect of this situation I do agree with:

There just isn’t a whole lot of money in licensing a phone operating system like this. We don’t know, because the information isn’t public, just how much a Windows Phone 7 license will cost an OEM, but it’s generally assumed to be a few tens of dollars. Even assuming $30 per unit (which from what I can tell is on the high side), Microsoft’s partners would have to ship a whopping 30 million handsets to make this a billion-dollar business.

The first question that comes to mind then is: why is it a good idea for Google (s goog) to give away Android and a bad idea for Microsoft to charge a license fee? The difference is in the business model. Google wants to keep its core, lucrative business in front of every eyeball it can with search and advertising. By being the dominant search engine, Google gains key information on search preferences or how consumers think when they use the web to find information. And of course, those preferences are paired with contextually relevant advertisements, where Google earns the bulk of its revenue, which it then shares with handset makers who use Android. Simply put: Google doesn’t need to charge for Android and if it did charge, that would add a barrier to adoption by hardware partners.

On the other hand, Microsoft does have to charge for its platform because it only has a small segment of the mobile search market and therefore earns far less money overall on mobile advertising. And by “small segment,” I’m probably understating the difference in both search and mobile search between Microsoft and Google. TechCrunch points out a Pingdom chart comprised of data from StatCounter, showing that Google owns more than 98 percent of the mobile search market. Microsoft’s Bing is a blip on the mobile map, not even registering a half a percent.

So based on the business model and consumer usage, Microsoft isn’t well placed to generate the kind of mobile search revenues of Google. The company has to charge a Windows Phone 7 licensing fee in order to get any real return from the platform. Other revenue opportunities are tied to Microsoft services – which will be heavily integrated into the new handsets — but income from those are variable. The only fixed income from Windows Phone 7 is an up-front fee.

The alternative is what Bright suggests: Microsoft goes it alone and builds handsets of its own and thus controls the entire experience of hardware and software, just as Apple (s aapl) does. Although Microsoft is a software company, it has broken out of the mold with the Zune and Xbox line of hardware. But at this point, it’s just too late for mobile. With Windows Phone 7, Microsoft has lined up hardware partners such as Dell (s dell), Asus, LG, HTC, and Samsung. There’s no way Microsoft can cut these companies off at the knees now and go it alone by building a Microsoft handset.

Perhaps another opportunity will appear when Microsoft can create its own phone, but even then, the company is at risk. Four of the five handset partners are also companies that build Microsoft Windows computers. If Microsoft cuts them out of the loop in mobiles, it won’t sit well with them from a notebook and desktop standpoint. Granted, I doubt that any of these partners would completely jump ship to Ubuntu, but such a situation would raise tensions between Microsoft and its partners.

And taking the theoretical one step further by assuming that Microsoft ever does build its own phone, how would such a beast compete in the market? From a perception standpoint, I’m not sold that consumers would embrace the Microsoft brand on a handset. Microsoft’s Zune hasn’t staged much competition against the iPod juggernaut even though Zune is a compelling device, as is the Zune Pass subscription service. Microsoft’s recent Kin debacle may be more attributable to internal politics and lengthy delays, but even had the device arrived on time, it wasn’t groundbreaking from a hardware perspective. Perhaps Microsoft should just ride the mobile platform licensing train down the tracks and leave it at that.

Related research on GigaOM Pro (sub. req’d):

To Win In the Mobile Market, Focus On Consumers