Microsoft Wins Biggest Phone-Software Order, Rivals BlackBerry

April 4 (Bloomberg) -- Microsoft Corp. won its biggest-ever contract for mobile-phone software, an order from the U.S. Census Bureau that covers 500,000 handsets.
Microsoft, the world's biggest software maker, plans to unveil the deal today, general manager Scott Horn said in an interview. Redmond, Washington-based Microsoft expects to increase its mobile unit's sales to $1 billion in one to three years, from $337 million last year, and break the dominance of Research In Motion Ltd.'s BlackBerry.
``Up until now, BlackBerry had the market for themselves,'' Peter Knook, a Microsoft senior vice president, said in an interview. ``That landscape has changed.''
Sales of handsets with Windows will double to 20 million units in 2007 as corporate customers opt for those devices instead of the BlackBerry, Knook said. They still would be just a fraction of Microsoft's almost $40 billion in annual sales.
The company declined to disclose the value of the Census Bureau contract for Windows Mobile phones, which can link to the Internet, run Office, read e-mail and play music. Census takers will use them in collecting information door-to-door during the 2010 U.S. census.
Microsoft already won contracts to supply software for Palm Inc.'s Treo and Motorola Inc.'s new Q, after five years of delays and problems with its product.
Playing Catch-Up
It's still an uphill challenge for Microsoft. Researcher IDC expects shipments of Windows-based phones to double in each of the next two years. Even then, the software will account for only 13 percent of the total market, which includes business and consumer users, Framingham, Massachusetts-based IDC said.
``They're nowhere right now,'' said analyst Kevin Burden at IDC. ``RIM is still the mobile enterprise solution that all others should be measured against.''
Research In Motion spokeswoman Marisa Conway declined to comment. The Census Bureau phones will be built by Taiwan's High Tech Computer Corp.
The first sign that Microsoft was cracking the market came in September, when Palm said its new Treo would use Windows, after three years of clandestine meetings. During the project code-named Hendrix, staff referred to Microsoft as Woodstock and Palm as Purple Haze to keep it secret, Knook said. The companies had been rivals, and they didn't want workers to find out too soon.
Close Call
The secret almost came out in March 2004 in a private dining room at Arnaud's Creole restaurant during the CTIA trade show in New Orleans. In the next room, a Microsoft salesman met with phone retailers the companies didn't want to know about the pact, Knook said.
As six executives from Microsoft and Palm sat in the bar pretending not to recognize each other, restaurant workers ran upstairs to shut windows and doors connecting the rooms. Over a platter of oysters, executives hashed out sales, marketing and pricing strategy for the device.
The result: Microsoft won a spot in a device that sapped the strength of BlackBerry. Palm's Treo gained 564,000 users last quarter, almost as many as BlackBerry. Palm doesn't break out how many Treos have Windows. Research In Motion forecast BlackBerry user growth of 620,000 to 630,000 last quarter.
Being in the Treo is ``critical for Microsoft,'' said Page Murray, Palm's vice president of marketing. ``Nobody came out with a terribly viable Windows Mobile device prior to this. There was plenty of hardware out there, but nothing that captured the hearts and minds of people.''
Microsoft shares rose 35 cents to $27.56 yesterday in Nasdaq Stock Market composite trading. They've risen 9.1 percent since the Palm deal was announced.
Motorola Inc., the world's No. 2 mobile-phone maker, was the first company to put the software in phones in the U.S., in 2003. In the next several weeks, Schaumburg, Illinois-based Motorola will begin selling its BlackBerry rival, the Q, with a full keyboard and fast Web access.
Getting it Right
``We had a good understanding that sooner or later Microsoft would get it right,'' said Scott Durchslag, general manager in Motorola's mobile-devices division. ``We thought we could help make it sooner. It was a bet that paid off.''
Some analysts are optimistic. Delivering e-mail to Windows phones will cost less and the devices offer a wider array of features, Forrester Research Inc. analyst Ellen Daley said.
Windows runs 5 percent of high-end devices, which cost $300 or more, at large businesses in North America, she estimated. By 2010, Microsoft may have 60 percent, taking customers from BlackBerry, which now has 80 percent, according to her estimates.
Out of Parking
Knook added 150 people to his staff of more than 2,000 this year. Parking hasn't been able to keep up. With almost two cars for every space, one of his four buildings moved to valet parking.
He wants to enter the consumer market, where he also will fight top handset maker Nokia Oyj, which focused on software for consumer phones and is now also targeting BlackBerry. Espoo, Finland-based Nokia in February bought e-mail software maker Intellisync Corp. and formed a joint venture with Sanyo Electric Co. to improve sales of high-end phones in the U.S.
Knook's group is spending $25 million through June 30 on its first advertising campaign targeted at users. Since February, banners in airports and bus stops in cities from New York to Los Angeles to Paris ask travelers whether that's ``Microsoft Office in your pocket.''
``You may have the best technology, but if you've never told anybody you don't get any credit for it,'' Knook said. ``That's not something you fix overnight.''