Steve Ballmer Says Smartphones Came Between Him and Bill Gates (fortune.com)

Steve Ballmer once said Apple's iPhone would flop because it cost too much -- though he now admits that he failed to anticipate carriers subsidizing the cost of the phone. But that was only the beginning. An anonymous reader quotes Fortune: The former CEO of Microsoft says he and Gates drifted apart over Microsoft's move into the hardware business in the early 2010s, according to Bloomberg. Ballmer says he was the one who pushed for Microsoft to design smartphones and tablets at a time when Apple was already well established. He says Gates and the board seemed reluctant to do so. "There was a fundamental disagreement about how important it was to be in the hardware business," Ballmer told Bloomberg. "I had pushed Surface. The board had been a little -- little reluctant in supporting it. And then things came to a climax around what to do about the phone business."
Microsoft eventually took a $900 million write down for its first tablet, the Surface RT -- plus most of the value of their $9.5 billion acquisition of Nokia Oyj's handset unit as Microsoft pushed into hardware. "Ballmer's only regret: not doing it sooner," Bloomberg reports, adding that Surface is now profitable and this year will generate more than $4 billion in sales.

Comments

Re:Subsidies

[Tx]

Apple's initial pricing scheme for the iPhone actually was different from the norm, but what Ballmer is missing is that it didn't work, and was dropped. So I'm not sure if Ballmer is talking about the initial unsuccessful model or the (as you say already widespread) traditional model that they reverted to. Not clever either way.

The pricing for 1st generation iPhone was a departure from the traditional wireless pricing model. Apple sold the phone to consumers at a modest discount and recouped their lost profit through kickbacks from AT&T in the form of a cut of the monthly service revenue. This was a great deal for Apple and AT&T but terrible for consumers. Consumers had to pay almost full price ($500-600) for an iPhone AND had to sign a 2-year contract. AT&T offered only 3 rate plans, which fortunately were price competitive with other carriers. These plans included an allocation of voice minutes, 200 text messages and unlimited data. However the original iPhone did not support 3G data or picture/video messaging, like a lot of the other phones on the market. Goldman Sachs predicted AT&T would activate 700,000 iPhones on launch weekend, they only activated 146,000.

While sales of the original iPhone were growing steadily, they were missing out on mass appeal because of the iPhone’s high initial cost. For the iPhone 3G, AT&T re-negotiated the revenue sharing deal and went back to a traditional handset subsidy model. Consumers would pay $200 less for the iPhone 3G. While $199 for an iPhone looked great, AT&T made some changes to the rate plans. The net result was that to get the same thing as you got with the original iPhone, (voice, unlimited data and 200 texts), you would pay $15 more per month ($10 for 3G data and $5 for 200 texts).

(from AT&T and the iPhone

Re:Microsoft did mobile wrong

[Anonymous Coward]

You're aware that the portable versions of WinCE/WinMobile have been commercially available in third-party devices since 1996, right? And smart phones as early as 2003? That is exactly the tact that Microsoft first followed; they developed the OS as a series of components and allowed the hardware manufacturers to customize the image to the device. It was also a wide-open platform that allowed anyone with a compiler to write an application in a multitude of languages and frameworks and deploy that application to the device. Flash, J2ME, .NET, C++, whatever. WinMobile ran on a wide variety of devices with different capabilities and form factors.

Everyone from the old guard was taken by surprise from Apple. If anything Microsoft might have fared the best. Palm and RIM are much worse off.