The Two Biggest Misses in Mobile

There are some interesting parallels between Intel and Microsoft. Both of them missed mobile. Actually they didn’t completely miss mobile, both of them had programs from early days. But clearly they both regarded mobile as a much lower priority: the PC was where all the money was and where it would continue to be forever.

When I was at VaST, Intel had a huge program in mobile built around their own ARM processor xScale (originally called StrongARM when it was first developed at DEC before Intel purchased the semiconductor division). They never had any real success that I know of and eventually they sold the entire xScale development and the teams around it to Marvell. Their next attempt was to purchase Infineon’s wireless division. At the time, Infineon supplied the chipset for what we might now call iPhone1, although of course it was just called iPhone at the time. Apple then switched to Qualcomm for modems and built its own baseband chips (Ax).

With those programs Intel pretty much manged to miss 2G (GSM for most of the world, CDMA too in US and Korea) and 3G. For 4G, also known as LTE, Intel acquired Fujitu’s LTE modem division (which actually had roots in Freescale/Motorola) to add to the LTE team they already had from Infineon. They now have working LTE modems shipping, although one of the not widely publicized aspect of this is that they don’t manufacture them in Intel fabs, they are built by TSMC. On their latest conference call they said the schedule for bringing those in house was late 2015 or early 2016.

I read a recent report that said “the mobile unit is a major drag on the company’s profitability and the management really needs to focus on this potential area of growth.” They are investing (losing) over $1B per quarter in this market, if that is not focusing on this area then I don’t know what is. The bigger question is how long they can go on hemorrhaging money if they don’t start to get real traction with customers. They make so much money in their mainline microprocessor business that in some sense the answer may be “forever” but to what end?

Microsoft has made forays into mobile in the past. First they had a mobile operating system called WindowsMobile. This was moderately successful and in 2004 (pre-iPhone, pre-Android) it had 25% of smartphone sales (Nokia’s Symbian pretty much all the rest). I actually had a Samsung Blackjack for a year or two that used it. But as iPhone and Android came along its share declined.

In 2010, Microsoft decided to enter the mobile hardware business with a phone called Kin. It turned out to be the shortest lived phone ever since it never got any traction with any of the major carriers, and a couple of months after introduction was quietly canceled.

Microsoft then developed WindowsPhone (WP). This had a few phone manufacturers at least experiment with using it. Then Stephen Elop went from Microsoft to be CEO of Nokia. Conspiracy theories abound as to whether he was some sort of a trojan horse, sent to Nokia to deliver it into Microsoft’s clutches. The first thing that he did was to cancel all Nokia’s internal operating systems (Symbian, Meego and Meltemi) and standardize on…Microsoft’s WP. Nokia’s smarphone sales instantly cratered and went unprofitable since there were no WP-based phones available when that announcement was made. It was never profitable again. Layoff after layoff ensued and then at the end of last year (closed in April) Microsoft acquired Nokia (this was still in the Ballmer era when the deal was done).

Now Microsoft has a new CEO, Satya Nadella, and he seems to see no future for Nokia (now rebranded under Microsoft). The recently announced layoff of 18,000 jobs (the 4th biggest tech layoff ever) falls mainly on the acquired Nokia divisions. If you look at this a certain way you could argue that Nadella thinks the acquisition was a mistake but can’t just stand up and say that without making the company look foolish. “You wasted how many billion?”

The smartphone market has finished its period of explosive growth. This is especially so at the high end where iPhone and Samsung Galaxy dominate and suck all the profits out of the entire industry. Everyone in Europe, US, Japan, Korea and even middle-class parts of China has a smartphone if they want one. The low end, in India, China, Africa, South America, is where the action is but this doesn’t play to either Intel’s strengths (their business model requires high margins) nor to Microsoft’s (they want royalties from 3rd parties whereas Android is free). Oh, and talking of Android, to nobody’s surprise Microsoft just canceled the Android-based Nokia phones announced only in Q1 this year.

My own opinion is that it is too late for either of them. Intel will not displace Qualcomm, Mediatek and the other established players. Even companies like TI and Broadcom have exited the market. Microsoft really has no other licensees for WindowsPhone than Nokia, meaning that for now at least they themselves are their only licensee with about 3% of market share for operating systems. Microsoft and Intel will just hang in there for now and eventually quietly withdraw, to focus on other product areas where they can be successful.

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