If Microsoft (MSFT) is going to make mobile a big, profitable business it needs to do better than the Windows Mobile updates that Steve Ballmer announced last week.
So what’s the next step?
Microsoft should buy Research In Motion (RIMM), the company that makes BlackBerry smartphones.
RIM shares fell another 4% today, and have lost about a third of their value this month. With RIM’s market cap down to around $21 billion, Microsoft might be able to get the deal done for $35 billion.
Why buy RIM?
- The smartphone market (and ultra-mobile computing in general) is growing.
- RIM has a higher market share than Microsoft, and it’s growing. Microsoft’s is shrinking.
- RIM has a huge enterprise business with a high cost of switching, one that complements Microsoft’s enterprise business. Microsoft should own that business.
- RIM’s products are, in many respects, better than Microsoft’s.
But the best reason for Microsoft to buy RIM is that RIM has a better mobile business — collecting revenue from BlackBerry device sales and service fees, instead of just software licensing fees.
RIM, for instance, gets several hundred dollars in revenue for each BlackBerry sold, plus BlackBerry email/Web service fees. Microsoft, on the other hand, has stuck itself with a lousy business selling Windows Mobile operating system licenses for $8 to $15 per phone, according to research firm Strategy Analytics.
So while analysts expect RIM to top $14 billion in revenue next fiscal year, Microsoft will be lucky to reach $400 million in Windows Mobile revenue (30 million Windows Mobile licenses at an average $12 a pop). That’s couch change for Microsoft, whose revenues should top $60 billion this year.
Sure, this would be a tricky deal to integrate, and there are a lot of big decisions to make. Microsoft will eventually have to pick one software platform — Windows Mobile or BlackBerry — and stick with it. It might have to abandon dozens of partners. It might blow up.
But Apple (AAPL) and RIM have shown that owning both the hardware and software platforms make for better mobile products. And Microsoft has enough to lose — to Apple, Google (GOOG), etc. — to avoid being a weak player in what could be the next major platform war. Meanwhile, RIM has today what could take Microsoft many years to build — a real, big, mobile business.
And why should RIM do this deal?
Because smartphones have become a waltz of elephants. With Apple, Google, Microsoft, Nokia, and other giants in the market — and RIM trying to win the hearts and minds of consumers — having the deep pockets and global reach of Microsoft behind it would be a major asset. And direct access to the world’s dominant desktop operating system could potentially give Microsoft-RIM phones an advantage over rivals.
If RIM doesn’t execute perfectly over the next three years, it could become the next Palm. (Before the Pre.) If it has the full weight and resources of Microsoft behind it, meanwhile, it can afford to ramp up its investment without killing its stock… and fight off increasingly powerful competition.