SEMIACCURATE’S MOLES TOLD us the dirty little secret of Windows Phone 7, no one pays for it. Yes, to compete with Google’s price for Android, free, MS is charging the same price, just not directly.
We were sitting in a bar with a high up representative from a major phone maker, lets say they are one of the top few in the industry. When the topic of WP7 came up, we asked the usual question, “Wince is about as beloved in the industry as an unexplained genital rash. Given the bloated hardware it needs just to perform slower than a Linux based phone, you blow out the BoM cost compared to an Android phone. MS wants to charge money for an OS on top of that? How do they think they will compete? The phones will cost way too much.”
The reply was one we were not expecting, that Microsoft knows this, and is giving WP7 away. Officially, they pay for a license, but Microsoft has guaranteed that they will get all that money, plus more, back through other channels, advertising, and other less direct methods. Windows Phone 7 is free, or to use the term tossed around about Android’s cost, ‘less than free’.
This means that if a phone maker takes Android and spins thier own version, it costs them nothing. If they use the Google branded version, it costs nothing, and they get a cut of the revenue generated by that phone, so they get cash back. The net cost is between zero and ‘less than free’, the phone makers can pick whichever they want. At the moment, MS seems to only be matching the free version, but there may be back room deals on top of this that our sources have not heard about.
Yes, Microsoft is competing with free and open software on price, not the smartest thing to do if you are a for profit company. According to my source, it isn’t a one time thing either, not just a temporary launch price to get their foot in the door. He indicated that if MS tries to back off on their pricing model, they will find out exactly how much phone makers think of Windows Phone 7. He strongly hinted that tepid sales more than adequately reflect the love felt by OEMs for the OS.
This ‘pricing model’, basically kickbacks in a legally palatable form, are nothing new in the industry. A good recent example of the breed came out in the Intel/AMD settlement a bit over a year ago. Intel vehemently denies ever giving Dell free CPUs, but if you do the math, it is unmistakable. The first digit in of the price Dell paid for some Intel CPUs was a minus sign, something that is explicitly forbidden now. This kind of thing is very common in IT, it just rarely gets talked about.
That brings us to the topic of the moment, Nokia. Officially, Nokia is paying for Windows Phone 7. Then again, officially speaking, so is everyone else. Officially, Microsoft is receiving tons of revenue for Phone 7. Ballmer can stand up in front of the analyst set and proudly proclaim that they are bringing in tons of cash, and they are. Just don’t ask about the commensurate increase in the marketing budget. That is not buried so deep in the fine print that a team of accountants couldn’t find it in a century, much less tie it to phones.
In the end, almost everyone gets what they want. Phone makers get an OS at a palatable ‘price’, Microsoft gets marketshare in a ‘profitable’ way, and investors think management is actually making things that people want to buy. On the surface, it all works out. Just don’t poke far below the surface, if you do, the whole Windows Phone 7 balloon deflates in a hurry.S|A