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

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

Lumia 900

The Lumia 900 smartphone that launched yesterday has the backstory of a summer blockbuster: Two aging veterans of the tech industry, Microsoft and Nokia, team up for one last caper. It seems like only yesterday that these titans ruled the computer and mobile phone industries. But then phones became computers and it all fell apart. Microsoft couldn’t translate Windows’ desktop success into the mobile space, and Nokia stumbled by betting on the Symbian OS while other device-makers embraced open source Android. Apple, once a relative dwarf compared to Microsoft, now towers above it in market capitalization thanks to its mobile dominance. Windows Phone 7 has been out for a while, but until now it has lacked a prestige, top-tier phone. Nokia’s Lumia 900 is supposed to lead Windows into the mobile promised land and upend the rapidly emerging Apple/Google duopoly.

The stakes are high, too, for the Lumia 900’s exclusive carrier in the United States, AT&T. When the iPhone was first unveiled, AT&T took a risky bet on a new entrant and it paid off big time. But since the iPhone came to Verizon last year, AT&T has lost its key competitive edge. Verizon has rolled out its high-speed LTE network in more cities, and AT&T desperately needs a new flagship to cover up the relative weakness of the network.

The three collaborators promised the biggest rollout ever of a new phone, with AT&T device chief Jeff Bradley telling CNET last month that it would be “a notch above anything we’ve ever done,” including the iPhone launch. Less than 48 hours in, I’m underwhelmed by the marketing push. If this is a do-or-die product for Microsoft in the mobile space, then it’s going to die.

The problems start with a stunning lack of attention to detail. On Sunday afternoon, I strolled from my apartment to the nearest AT&T store to see what the launch looked like on the ground. The store was closed. I took the Metro to another AT&T store in Northern Virginia. Also closed. I called up an AT&T store downtown: closed. It was, of course, Easter. Who launches a product on Easter?

When I tried again Monday afternoon, the AT&T store near Dupont Circle was not exactly suffering from excessive demand. Smack in lunch hour, store employees outnumbered customers—a literally unthinkable scenario at an Apple retail store 24 hours after the launch of a flagship product. The pre-launch hype had promised that the Lumia would “be the centerpiece at AT&T stores, with massive signs and posters promoting the device.” There was, in fact, a poster. On the other hand, there was no Lumia 900 on display. Comp phones had been provided to AT&T retail personnel, so someone was able to show me one, though she had to go to the back to get it, as if she hasn’t actually decided to use it. Once in hand, the Lumia 900 at first seemed like a cool device. But then things went a bit off the rails.

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.

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.