Microsoft gearing up to take on Apple iPhone

Microsoft is gearing up to take on rival Apple in the smart-phone market.

The Wall Street Journal reported on Monday that Microsoft is getting ready to launch an online marketplace akin to Apple's App Store. In August, Microsoft had started looking for people to head up the new application store. Microsoft is also readying a more sophisticated version of its mobile operating system, Windows Mobile 6.5, the newspaper reported.

Smart phones are sophisticated mobile phones that offer users access to the Web and email, as well as providing phone calling and other messaging options. This category of device is seen as the biggest growth engine for mobile devices over the next few years.

Microsoft, which only makes the operating software for these devices, holds third place in terms of worldwide market share, according to research firm IDC. Symbian, which powers Nokia's smart phones, is by far the leader, followed by RIM with its BlackBerry devices. Even though Apple's iPhone seems to be the most talked about smart phone on the market these days, it's only in fifth place in terms of overall market share for 2008, IDC said.

But Apple is quickly gobbling up market share and has become a serious threat to Microsoft and every other company competing in the smart-phone market. With the release of the iPhone 3G last summer, Apple has tripled its market share from three per cent in 2007 to nine per cent in 2008, according to IDC. Meanwhile, Microsoft only grew from 11 per cent market share in 2007 to 12.3 per cent in 2008.

Microsoft faces several challenges as it tries to match Apple's growth rate. For one, the company's business model is based primarily on licensing software to hardware vendors. While this business model worked well just a couple of years ago, it's difficult to justify now, given that device makers can get free software from Symbian, Google Android and Linux.

The second problem that Microsoft faces is that it has been almost exclusively focused on business customers. Over the past year, smart phone users have gravitated towards more consumer applications. In addition to their work email, they want multimedia functionality and social-networking applications on their phones.

"Microsoft is in a really tough spot," said Ryan Reith, an analyst with IDC. "It has to change its value proposition. And a big part of that is refreshing its user interface and making the device more consumer-friendly."

Reith believes this is why it's critical for Microsoft to develop an application marketplace that can compete with Apple's App Store. The App Store went live last summer and offers thousands of applications for the iPhone and iPod touch music player. The store has been very successful, with users downloading thousands of free and fee-based applications.

Microsoft already has a developer community creating applications for Windows Mobile devices. The problem is that many of these applications have been geared toward business users. And there is no single destination that makes it easy for users to discover and download different applications.

"Clearly smart phones are not just for business users anymore," Reith said. "Microsoft needs to work with the developer community to get more consumer applications out there."

Microsoft's executives have got the message that consumer functionality is in demand. Andy Lees, the head of Microsoft's mobile-business unit, told The Wall Street Journal that the company is about to put more emphasis on multimedia and other consumer functions, like music and photos.

Microsoft is expected to unveil its new offerings next week at the Mobile World Congress tradeshow in Barcelona. Chief executive Steve Ballmer will be delivering a keynote speech there on 16 February.

But, even with such enhancements, Microsoft has a tough road ahead of it. Competition in the smart-phone market is increasing, and several competitors, including Google and RIM, are launching their own version of an app store.

On the handset and operating-system side, new devices are coming to market that could provide stiff competition for Windows Mobile devices. For example, smart-phone pioneer Palm is coming out with new mobile software and a device called the 'Pre' later this year. Even though critics have been writing the company's obituary for the last year, the new device, which was unveiled last month at CES in Las Vegas, has been causing a buzz.

But Microsoft thinks it has the right enhancements lined up to take on these competitors, especially Apple.

The newspaper also reported that Microsoft is talking about a new synchronised data-storage service called 'My Phone'. This service is supposed to make it easier for people to back up their mobile contacts, calendar appointments, photos and text messages to a Web site. The service is similar to Apple's MobileMe. The biggest difference will be that Microsoft will offer My Phone for free, whereas Apple charges for MobileMe.

It's too soon to know how Microsoft's new software and application store will stack up against Apple's offering. But, one thing is certain: Apple isn't sitting still either. If Microsoft or any other competitors want to keep ahead of Apple in this market, they'll have to produce something truly revolutionary.