We've argued before on these pages that Microsoft should build its own smartphones. The real money in the smartphone market doesn't come from licensing an operating system, as Microsoft does with Windows Phone, or apps, as Google does on Android. It comes from building smartphones for $300 and selling them to carriers and consumers for $600.
Microsoft, however, went for the traditional licensing route with Windows Phone 7, and until recently, it looked like the company was sticking to the same formula for Windows Phone 8, with Samsung, HTC, and Nokia all unveiling forthcoming Windows Phone 8 devices.
But a number of rumors suggest that this may be changing. China Times, Boy Genius Report, and WPCentral are all claiming that Microsoft is working on its own high-end smartphone, to be sold with the same Surface branding as the company will use on its forthcoming tablets.
Taken together, the rumors say that the Microsoft smartphone will come out some time in 2013, and that the change in strategy is due to Windows Phone's failure to acquire market share, or perhaps discontent with the way Nokia's "Lumia" brand appears to have gained better traction than the "Windows Phone" brand. The final decision to go ahead with the Surface phone will supposedly rest on the success (or otherwise) of the Windows Phone 8 handsets that will be released later this year (though exactly when they'll come out remains a mystery, due to Microsoft's continuing secrecy about the new operating system).
We can't speak to whether these rumors are true or not, but it's worth considering the implications they have if there is indeed a kernel of truth behind them. As supportive as we are of Microsoft building its own phones in general, this seems like a bad way of doing it. We don't doubt that Redmond could produce a desirable piece of hardware—for example, something bringing the VaporMg finish to a smartphone. We're just struggling to see how it would improve Windows Phone's position in the market.
The Surface tablet makes sense for two reasons. First, because the PC market is awash with mediocre, poorly designed machines, and Microsoft needed to ensure that there was at least one system that looked good and showed off Windows 8 at its best. The Surface tablets are flagship devices, something that Microsoft simply couldn't trust the OEMs to produce.
With the many weird Windows 8 devices shown at IFA in August, it looks like Redmond's decision was probably a wise one, too; while there will certainly be some interesting designs hitting the market later this month, none of them really stood out as flagships.
Second, the PC OEMs have their backs against the wall. If they don't preinstall Windows on their systems, they're going to struggle to sell any PCs. Microsoft knows this, and it gives the company the ability to compete with the OEMs head-to-head without worrying too much that they'll drop out of the market altogether. That's just as well, too, because Microsoft needs those OEMs to provide volume shipments.
Smartphones: they're not PCs
The smartphone market is in a different position.
Windows Phone has certainly struggled. The first iteration of the software, released almost two years ago, held promise, but lacked important features. The early hardware was nothing special, either, with nondescript phones that did little to stand out.
But things have, slowly, been heading in the right direction. Windows Phone 7.5 fixed most of the functional omissions of the operating system, and Nokia's devices have a certain visual flair, setting themselves apart from the plethora of black slabs that permeate the smartphone market. Market share is still lower than Microsoft and its partners would like, but it seems to be heading in the right direction: market research firm Kantar Worldpanel says that in the 12 weeks ending September 2nd, 2012, Windows Phone was taking 5 percent of sales in the EU's top five markets (Germany, UK, France, Italy, and Spain), up from 3.8 percent in the same period in 2011. This growth seems to be stimulated by Nokia's range of devices.
Windows Phone 8 is still something of an unknown quantity, but the fault here is all Microsoft's. What we do know is that, while Samsung's design, the ATIV S, doesn't buck any smartphone trends, the new Nokia Lumia 820 and 920 and HTC 8X and 8S are all strikingly different and good-looking handsets that will stand out in retail. Although Nokia's handling of the matter has been nothing if not cack-handed (though Microsoft's software situation may have been a contributing factor here), the Lumia 920 also boasts a standout camera that will give it unique appeal.
So as best we can tell, the OEMs are doing their part, and doing it well. This isn't to say that the various handsets will fly off the shelves when they go on sale, necessarily, but they are at least very credible offerings. The Lumia 920, in particular, can stand as a genuine flagship device, and the HTC 8X shapes up pretty well, too. If they don't sell, it won't be because they're under-specified, under-powered, or unattractive.
In other words, there's no need for Microsoft to come in with a "Surface Phone" to shake up the OEMs and force them to up their game. They've upped it themselves.
Second, the smartphone OEMs are not captive in the way PC OEMs are. Samsung could drop Windows Phone and it's unlikely that the dent it made on the company's sales figures would even be detectable. Android is the Korean firm's bread and butter. HTC's position isn't as strong as Samsung's, but it's still the case that its Windows Phone business is small beer. If Microsoft pushes these companies in a way they don't like, they can easily respond by dropping Windows Phone entirely, and in so doing, reducing its carrier and retail availability.
Nokia's situation is of course different. Publicly, at least, it has no plan B, no alternative should it wish to abandon Windows Phone. If Redmond decided to squeeze the Finnish company out of the market, it'd probably be the final nail in its coffin. While Microsoft would no doubt love to pick up Navteq on the cheap, it's hard to see just how such a move would improve Windows Phone's market position—it'd just put an end to the interest and recognition that is slowly growing.
Microsoft may be aggrieved that it's "Lumia" that people want, not "Windows Phone" but it's hardly surprising that Nokia has focused on its own branding, given the way "Windows Phone" is still routinely linked to "Windows Mobile" by retail personnel. Why would Nokia want to deliberately weigh down its own products by hanging that boat anchor on them? The brand name hardly matters to Redmond's revenue, anyway; Android is on plenty of smartphones, even if the brands that users care about are (Verizon's) Droid and (Samsung's) Galaxy. And it's not like hurting "Lumia" will mean that consumers ask for "Windows Phone" instead. It will mean they just ask for "iPhone" or "Droid" or "Galaxy" in even larger numbers than they already do.
Unlike the Surface tablet, a Surface phone is unlikely to improve the quality of devices available on the market, and it's going to drive other OEMs away from Microsoft's operating system. In turn, this will further diminish Windows Phone's retail visibility and carrier connections. None of these things could possibly help Windows Phone.
Similarly, the things that do hurt Windows Phone—a persistent lack of both "big-name" applications (Where is Instagram? Where is Angry Bird Space?) and "real world" applications (you can be sure that if a bank, retail store, or sports team has a smartphone application at all, then it will have an iOS version; it almost certainly won't have a Windows Phone one), weak advertising, limited in-store promotion, and, for Windows Phone 7.5, hardware that fares poorly in bullet-point spec comparisons—aren't in any way improved by the shipment of a Surface Phone.
A Surface Phone fixes nothing. On the contrary; the disruption a Surface Phone would cause to Nokia's name and carrier connections (outside the US) would tend to further diminish promotion and marketing of the platform, and make developers even more reluctant to gamble on it.
One possibility that might avoid these OEM and carrier difficulties would be a limited-availability Surface Phone, similar to Google's various Nexus phones. That is, Surface Phone wouldn't be a mainstream, mass-market device, but a limited, unsubsidized option targeted especially at developers and enthusiasts.
But that doesn't make much sense for Microsoft. Google's situation with Android was different. First, Google needed to raise the Android hardware bar, which the Nexus 1 arguably did. Second, Google needed a range of handsets that it could guarantee had access to the latest version of unadulterated Android, to give developers something to target. The Windows Phone OEMs have done the former all on their own, and the OEMs and carriers simply can't alter the Windows Phone operating system the way Google OEMs and carriers can. While there have been delays and limitations in the availability of software upgrades, these limitations have been entirely under Microsoft's control, and in any case, the company promises that it will be different (and better) with Windows Phone 8 anyway.
Windows Phone simply doesn't need a Nexus device.
When it comes to revenue, building its own hardware is still Microsoft's best long-term option. If the OEMs were being useless, if there were no name recognition or relationships around Windows Phone at all, then building its own phones would clearly be Microsoft's best short-term option, too. Similarly, if Windows Phone were so successful that entering the market wouldn't scare off Samsung, HTC, and Nokia, then building its own phones would be a good option for Redmond. And if it were still 2010, building its own phones would have let Redmond veto cheap materials and flimsy construction, and also ensure that Windows Phones weren't merely minor variants of existing Android models: it would have been an appealing option back then, too.
If, however, things remain on the trajectory they're currently on, with Windows Phone as a small but growing player, a Surface Phone would be a spectacularly bad idea. It would address none of the problems faced by Microsoft's operating system, and would nip the limited successes in the bud.
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