Windows Phone 7, Collateral Damage Edition

Verizon getting the iPhone is cruelly timed torture for Microsoft and Windows Phone 7, already facing an uphill battle against Android and other smartphones.

By Dave Methvin 

January 18, 2011 04:00 PM

Although we don't know the exact sales figures for Windows Phone 7, some of the phone makers have said they were disappointed with Microsoft's inaugural push into the market. Verizon's announcement of an iPhone and the already-robust Android market will prevent an effective second push in 2011. 

There's no doubt that Verizon will sell a lot of iPhones out of the gate. What we don't yet know is whether those sales will come from existing Verizon customers or from disgruntled AT&T customers who have been yearning for another network to satisfy their iPhone desires. Right now, only AT&T is The Official iPhone Carrier. That has given other carriers the opportunity to fill an anti-AT&T niche, using BlackBerry, Android, and yes, Windows Phone 7. A Verizon iPhone changes all that, especially since Verizon is the country's largest carrier.

As for who is hurt by a Verizon iPhone, most people are focusing on Google's Android. Together, the two iPhone carriers hold more than 60% of subscriber share, more than doubling the iPhone's potential reach from when it was at AT&T alone. Since Verizon was not selling the iPhone before, it's a near-certainty that some of the iPhone's success on Verizon will come at the expense of other smartphone makers. But at least BlackBerry and Android are already well-established in the overall market and offered by all the carriers, not just Verizon and AT&T. Microsoft doesn't have that luxury.

Analysts are haggling over how much Verizon's iPhone sales will be due to a larger smartphone pie over time, how much results from AT&T defections, and how much comes at the expense of competitors who currently have Verizon customers comfortably to themselves. If above graph of Android ad impressions is credible, it seems like the iPhone has basically sucked the oxygen out of the room for any other smartphone on AT&T. That should have Microsoft very concerned, because they're in an even weaker position than Android. 

But let's not forget that iPhone had a multi-year start on AT&T's network; it basically defined the modern smartphone category when it was released in 2007. At Newsweek.com, Dan Lyons argues that the Verizon iPhone is too late, and perhaps it is -- if Apple's goal was to prevent Android from gaining a competitive foothold. But Android has established itself whether Apple likes it or not; millions of users have Android phones and multi-year contracts that ensure they'll be staying with Android for a while. When it comes time to choose a new phone, their familiarity with Android and its Google-centric services may be a strong factor in their choice. But again, there's no silver lining here for Microsoft, since they have almost no market share to provide momentum against the iPhone's braking force.

When Microsoft announced the carriers that would have Windows Phone 7 at launch, there were only two: AT&T and T-Mobile. Verizon was notably absent. Now it makes sense why Verizon decided to skip the coming-out party. Sure, it's possible that the taste of Kin hadn't yet left their mouth, but that seems like a petty reason. Most likely they didn't want to overshadow their iPhone launch in any way.

Microsoft says that Verizon (and Sprint) will have Windows Phone 7 devices by June 30 this year, but that is a long way off. It's an eternity when Windows Phone 7 will be dead to more than one-third of mobile subscribers in the United States, while the next six months bring continued growth for competitors. 

Since many average consumers don't even know Windows Phone 7 exists, Microsoft has been trying to build buzz by setting up kiosks in shopping malls. I had a first-hand experience at my local mall in Maryland, and it provides some insight into how difficult a job Microsoft has. Our family stopped by the Windows Phone 7 kiosk one night and looked at the phones. The staff there was very knowledgeable about the phones they had available for demo. Microsoft is definitely trying hard to make the public aware of their products. 

Microsoft's booth had a promotion where you could win a phone instantly by scanning a ticket. In a stroke of apparent luck, my son won that day's prize phone. It was the AT&T version of the LG Quantum, a handsome horizontal-slider phone with a very usable keyboard that retails for $400. That's a mighty nice thing to win, right? Well, not so fast. The phone only costs $100 with a two-year contract, and of course you'll need to activate an AT&T account and pay at least $55 a month for service. That price assumes you can live with a measly 200-MB per month data plan. AT&T doesn't offer a penny of discount for customers who bring their own equipment (T-Mobile does, for example), so a "free phone" doesn't sweeten the deal very much.

Then there is the software side of the equation. Windows Phone 7 is pretty and seems quite functional, although I think the folding tile animations are annoying and make the phones seem slower than they really are. But for many users, the cost of switching from their current phone's ecosystem to a Microsoft ecosystem will be more than they can bear. iPhone, Android, and BlackBerry users already know how to use the apps on their phones. The Windows Phone integration only works smoothly if you buy into all the Microsoft cloud services that underpin it: Hotmail, Bing, SkyDrive, etc. Users who've already put their heads in an Apple or Google cloud won't want to face the anguish of moving their data.

The undisputed financial winner in the Phone Wars, at least in the near term, is Apple. AT&T users can't just switch to Verizon and keep their old iPhone; they have to buy a new iPhone that works on Verizon's CDMA network. That's money in Apple's pocket. Perhaps we'll see a glut of used GSM-based AT&T iPhones being sold on secondary markets like eBay, but Apple is no doubt working on an iPhone 5 to make those old phones look unattractive to Apple fans.

I don't think there is any sort of intentional ploy by Apple, Google, or any of the carriers and device makers to pull a "cut off their air supply" on Windows Phone 7, because frankly it's not a big enough concern for the other players to worry about right now. Instead, Microsoft just got caught in an unfortunate crossfire. Between the fall of iPhone exclusivity and the rise of Android, they just can't get the kind of traction they need to make a dent in this market. I don't see that changing in 2011, no matter how much money Microsoft plows into it.