Aging giants Microsoft, Nokia, and AT&T believe this phone can save them. It can’t.

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April 9 2012 6:07 PM

Can This Phone Save Microsoft, Nokia, and AT&T?

The three aging giants have staked their future on the new Lumia 900. Oh, dear.

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Microsoft has convinced itself that its problem in the phone space is “network effects.” In the PC space, Microsoft long managed to be the dominant platform by virtue of its previous dominance. Everyone had Windows computers, so everyone wanted to write Windows software, so everyone wanted a Windows computer. I use Facebook primarily because other people use Facebook, but they in turn are using it because other people are already using it. In the mobile space, Microsoft is on the wrong side of this equation. People want phones with apps, but developers want to make apps for iPhone and Android that already have a large user base. Microsoft hopes to overcome this by paying app developers to port popular applications to Windows Phone and training AT&T salespeople to direct customers to substitutes for the key apps that Windows Phone lacks.

The salesperson I spoke to brought up the Lumia’s relative lack of apps unsolicited, describing it as “the biggest difference” with iPhone before pivoting to reassure me that I wouldn’t miss Pandora thanks to the availability of Rdio. A better strategy might have been to not talk about the apps unless the customer asks, and instead focus on the facts that the Lumia costs only $99 and unlike the iPhone can operate on the LTE network.

But the app obsession and its botched execution strike me as emblematic of an underlying flaw in the strategy. Trying to use Microsoft’s extensive cash reserves (it has more than $50 billion on hand) and still-large profits to overcome network effects is sensible. But why is Microsoft subsidizing app-developers when it could go further by subsidizing customer purchases of the phones? At the end of the day, no amount of subsidy is going to turn Windows Phone apps into a high priority for any company unless there’s a large installed user base. Dangling cash merely encourages developers to do the minimum and ship half-baked implementations to get the check. And, indeed, Lumia reviewers are already citing the low quality of third-party apps as a key weakness in the product. But if Microsoft subsidized the phones, then the users would have them, and then developers would follow. At $99, the Lumia 900 is pretty cheap, but imagine how much more appealing it would be if Microsoft actually paid you to buy one.

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The problem with this strategy is that Microsoft can’t subsidize hardware manufacturers to make Windows Phone products because Microsoft’s whole business is selling operating systems to hardware makers. Here it faces the essentially insurmountable problem that Android is available for free (and doesn’t make very much money for Google, despite its wild popularity). Trying to compete in this space is a doomed proposition. Gambling everything on a bid to extend Windows dominance into the mobile space makes the tech world more exciting, but it’s not going to lead to a happy ending for the company and its shareholders.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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