Game on for Gates

The Microsoft founder tells Paul Durman of The Sunday Times why he believes the company’s handset software is about to come into its own.

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By  Paul Durman Published  May 22, 2005

Game on for Gates|~|SENDING-OUT-200.jpg|~|SENDING OUT THE RIGHT MESSAGE: Chairman and founder Bill Gates launches the latest version of Microsoft’s Windows Mobile operating system.|~|AS Microsoft prepared to unveil its new Xbox videogaming console on MTV last week, Bill Gates was in Las Vegas to talk to 2000 software developers about something more arcane — specifically, mobile-phone operating systems and “killer” new programming interfaces. It is not for nothing that Microsoft’s chairman and founder has the official title of chief software architect. Despite his celebrity, Gates will always be more at home with computer code than consumer hype. The razzmatazz for Xbox 360 was left to Elijah Wood, who played Frodo in the Lord of the Rings film trilogy. Wood fronted the MTV show that last week lifted the lid on the stunning graphics possible on the new console. Like many technology companies, Microsoft is traditionally dismissive of mere devices, but it is starting to learn the hardware game. The white Xbox 360 is elegantly styled with concave sides, and is capable of either lying flat or being stood on its end — a big advance on the original uninspiring design. One reviewer described the new console as being like an iPod on steroids. The Xbox and mobile-phone software are both important areas for Microsoft, whose overwhelming dominance of the PC market makes it difficult, if not impossible, to sustain the historic growth from its enormously profitable Windows franchise and its Office suite of “productivity” software. To grow, Microsoft is looking to create new businesses centred on the internet (MSN), home and entertainment (Xbox) and mobile phones. The home-and-entertainment and mobile divisions have both been heavy lossmakers, but it is arguably the latter that is more in need of Gates’s help. The Xbox business is much the bigger lossmaker — running up US$3.5 billion of red ink over the past three years. However, the console has attracted a large following, with 20 million sold since 2002. Microsoft has also demonstrated that it can produce blockbuster games, such as the record-breaking Halo 2. With the Xbox 360 set to go on sale well before Sony’s next PlayStation, Microsoft has an opportunity to seize leadership of the games-console market from the struggling Japanese electronics giant. On the face of it, the progress of the mobile business has been much more modest. The mobile and embedded-devices divisions produced revenue of less than US$250 million last year — almost an irrelevance for a company that has annual sales of close to US$37 billion. In an exclusive interview last week, Gates was not downheartened. “We are just at the beginning of this,” he said. “Three years ago, we came out with our first mobile software. Two years ago, we had the first mobile operator shipping a version —Orange in France. Today we have 68 different operators [working with us] in 48 different countries. We are shipping 1 million units a quarter in Europe.” It is not hard to understand Microsoft’s ambition. Today there are about 650 million PCs in the world, the overwhelming majority of them running Windows. But there will soon be three times as many mobile phones — 2 billion in total. At the moment, most of these rely on simple proprietary software. Yet as the processing power of chips and memory storage improve, mobiles will increasingly become mini-computers, capable of managing contacts and diary information, displaying documents and spreadsheets, providing access to email and the internet, playing music and video — in fact, doing just about everything that a grown-up PC can do. Such “smart phones” have been available for two or three years, but as yet they represent only a fraction of the overall market — 17.5m of the 684 million handsets sold last year, according to Strategy Analytics. This is the opportunity for Microsoft, and for Windows Mobile, the cut-down version of its operating system. Gates was in Las Vegas last week for the launch of Windows Mobile 5.0, an update touted as offering important enhancements both for consumers and for application developers. “As phones get richer software, we can make a bigger difference,” said Gates. “The change that’s taking place really plays to our strategy. If you want more speech recognition, more productivity, it’s software that’s going to help provide that.” Windows Mobile 5.0 will make it simpler for users to access their music, videos and photos, making it easy to share (or synchronise) such content between their PC and their phone. They can attach pictures to their contacts as an aide-memoire. And businessmen will be able to review and rehearse Powerpoint presentations on their phones. This latest version of Windows Mobile will also support high-speed ‘3G’ mobile services, and other wireless technologies such as wi-fi. “The future for us is to do with market-share growth as these new services become mainstream,” Gates said. “Our concern is understanding what operators need, and coming out with rich new versions of the platform.” The technological advances will make mobile phones increasingly serious rivals to digital music players such as Apple’s iPod. Samsung has already developed a phone, the i300, with a 3-gigabyte hard drive — enough, said Microsoft, to store about 1000 songs. “We have taken leadership here,” said Gates. “The Samsung i300 [has] a fantastic user interface to select your tunes or playlist. It would be a better way to carry your music around. It will be a very high-volume thing.” Apple, current kingpin of the music-on-the-move business, has recognised the threat from the mobile-phone industry. The maker of the iPod is working with Motorola to incorporate its iTunes software into a mobile-phone handset. But the scheduled unveiling of this product in March had to be pulled at the last moment — seemingly because of resistance from network operators, who have their own plans to sell songs over the airwaves, and at prices significantly higher than those charged by iTunes. Gates is dismissive of Apple’s efforts so far to get into the mobile industry. “They’re not in the mobile area,” he said. “They did an announcement. We are doing more in this space than anyone.” The growth of Windows Mobile has been hampered by considerable industry suspicion of Microsoft. Even mobile giants such as Nokia have been concerned that Microsoft’s longer-term goal is to grab as big a share of the economic pie as it managed in the PC sector. The company’s reputation as a partner was not enhanced by its legal dispute with Sendo, the British mobile-handset company that was one of the first to embrace Microsoft’s operating system as the basis for its own smartphone plans. The 2001 agreement quickly fell apart in an acrimonious legal dispute, with allegations of intellectual property theft and financial skulduggery aimed at undermining Sendo. Microsoft settled the dispute last September. Nor did it help that early Microsoft-powered phones were prone to bugs, and some menu structures were poorly designed. Many of the early problems have now been tackled. Gates said many of the advances in version 5.0 “are kind of under the cover. The advances in quality and security — substantial work went into these things”. Microsoft has also taken a bigger role in the core radio technology. “We’ve really advanced the state of the art,” said Gates. Perhaps Microsoft’s biggest advantage is the familiarity of working with phones that use Windows Mobile. Programs such as Word and Internet Explorer are instantly recognisable; there is little need to relearn the software. Slowly, the strong pull of the Windows environment is taking hold. Microsoft has recently displaced Palm’s operating system as the leader in handheld computers, or PDAs (personal digital assistants) — an adjacent but much smaller market than the fast-growing smartphone business. “Our share of the PDA market is up around 70%,” said Gates. “That’s a good market we are very committed to.” Microsoft’s mobile rivals have started to license key parts of its mobile technology. Nokia surprised the mobile industry in February when it agreed to install Windows Media Player software in its handsets. Separately, the Finnish handset maker has adopted Microsoft Exchange Server software, reflecting Microsoft’s strong position in e-mail for the business market. In March, Symbian, the British software company that currently has an 80% share of the smart-phone market, took a licence for Microsoft’s Active Sync software, which manages the sharing of information between the PC and the phone. Symbian has its own synchronisation software, and it’s fine. But many users find that Active Sync produces neater results with less hassle. The big operators, notably T-Mobile and Orange, are becoming increasingly enthusiastic about Windows Mobile devices. They are finding that the range of features and services — particularly email — is encouraging customers to spend more time connected to mobile networks. In Britain, O2 has heavily promoted the XDA — a futuristic-looking smart phone made by HTC of Taiwan — to enhance its own rebranding (it used to be called BT Cellnet). Orange and T-Mobile have their own versions of the HTC designs, which they respectively call the M1000 and the MDA. Hamid Akhavan, chief technology officer of T-Mobile, said: “We are enthusiastic about the MDA family. The people who use these devices are early adopters, who see the benefit of this kind of device.” T-Mobile is planning to introduce the MDA IV, the first 3G phone powered by Windows Mobile. Akhavan said the phone would also support a connection to a wi-fi hotspot, thus offering the fastest possible data speeds at all times. Microsoft’s other great strength is the depth and breadth of the developer community that has built up around Windows. So far, Windows Mobile has racked up a few million sales — a drop in the ocean in the mobile market — yet there are already 18,000 applications available for use with the operating system, including everything from maps of London to accounting software, from diet managers to electronic games. Gates said: “Getting [developers] to build great applications is important to us. We have way more applications than other operating systems.” Gates can see many more possibilities. That certainly includes greater use of voice commands to control the phone. But he also talked of a phone that could translate a foreign sign into English just by taking a picture of it, or recognise expense receipts and process them. Despite this potential, and the scope for rapid growth, Gates played down the scale of the revenues that could be generated by Windows Mobile. “The actual mobile-phone software, we price it low,” he said. “It’s low-price, high-volume stuff. It will never be as big as Microsoft Office or the server-software business. We will get a business that’s hundreds of millions of dollars. The main cost that we need to defer is our R&D cost. If you can scale volume ... you get way beyond the R&D costs and get a very healthy business.” He added: “We’ve put a lot into this. We’ve put great people on to it. Making it work with all the services is of critical importance to us.” ||**||

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