Covering the digital giants, by Jon Fortt
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March 25, 2008, 9:01 am

Microsoft looks to cash in on the iPhone

Five iPhones
Microsoft has a profitable business building software for the Mac; now it has an eye on the iPhone, too. Image: Apple
Tom Gibbons
Tom Gibbons, head of Microsoft’s Specialized Devices and Applications Group, said the focus would be on extending Office functions onto the iPhone and iPod touch. Image: Microsoft

Don’t think for a minute that Microsoft is ignoring the iPhone. In fact, the software giant is probing the gadget for profit opportunities.

For a little more than a week, a team of the company’s Silicon Valley software engineers has been examining the iPhone software development kit (SDK for short), a set of tools Apple (AAPL) released this month that let outsiders build software for the iPhone and the iPod touch. Microsoft (MSFT) executives aren’t sure yet whether they’ll find worthwhile opportunities to sell iPhone software – but they seem eager to find out.

“It’s really important for us to understand what we can bring to the iPhone,” Tom Gibbons, corporate vice president of Microsoft’s Specialized Devices and Applications Group, told Fortune on Monday. “To the extent that Mac Office customers have functionality that they need in that environment, we’re actually in the process of trying to understand that now.”

Though it’s typical to think of Apple and Microsoft as pure software rivals, their relationship is actually more complicated. For more than a decade, Microsoft has maintained a group of engineers whose sole job is to develop software for Apple’s Macintosh operating systems. Most of the engineers in Microsoft’s Mac Business Unit are based in Mountain View, Calif., a few miles from Apple’s headquarters. (They also happen to be quite close to the headquarters of archrival Google (GOOG).)

The Mac unit’s work certainly isn’t charity – it delivers millions of dollars in profit for the company with its Mac version of the Office productivity suite. Microsoft doesn’t break out exact numbers, but we can extrapolate: Gibbons said the Mac Business Unit provides about a third of the revenue for the Specialized Devices and Applications Group, which also includes Windows Embedded, Microsoft Hardware, the Automotive Business Unit and Microsoft Surface Computing; the whole group did more than $1 billion in sales last year. So it’s reasonable to guess that the Mac unit provided about $350 million – and since Gibbons said the Mac group was one of the group’s more profitable units, it’s possible that Microsoft made somewhere in the neighborhood of $200 million in profit from Mac software.

Which brings us to the iPhone. With the Mac Business Unit, Microsoft has long prided itself on having one of the largest groups of Mac developers outside of Apple. With that expertise in Mac software, and knowledge of the Microsoft Exchange protocols the iPhone will use for business e-mail, the chances are good that Microsoft will be able to develop extra iPhone goodies.

“We do have experience with that environment, and that gives us confidence to be able to do something,” Gibbons said. “The key question is, what is the value that we need to bring? We’re still getting comfortable with the SDK, right? It’s just come out. So we had a guess as to what feasibility would be like, now we’ll really get our head wrapped around that.”

The Mac Business Unit isn’t the only Microsoft group eyeing the iPhone as an opportunity. Voice recognition unit TellMe, which Microsoft purchased a year ago, also sees potential in the device. Of course, TellMe now spends much of its time developing for Microsoft’s own Windows Mobile operating system. But as long as the iPhone SDK will allow software to take advantage of voice recording and location-based information, said general manager Mike McCue, TellMe will be all over it.

“If the SDK supports these things,” McCue told Fortune in February, “we’re absolutely going to get a version out there as soon as we can, get TellMe out there on the iPhone.”

The iPhone software update that opens the door to such third-party software is due at the end of June; that’s also when owners of the iPhone and iPod touch will be able to purchase the new programs. Until then, you can bet that developers everywhere – even at Microsoft – are hard at work.

Having worked for both the platform using native technologies, I can say that there is a fundamental, yet complimenting differences between the two. These two coming together is akin to bringing together the creativity AND responsibility. (I dont think I need to spell out who is creative and who is responsible :))…

Creativity and Innovation that brings about the best (and cool) in terms of user experience… and Responsibility, maturity and broader audience engagement that allows a person to continue to have an older version of the OS with the latest development tools…

Posted By Vibhu : March 27, 2008 1:52 am

I would have bought an iPhone a long time ago IF THEY SUPPORTED EXCHANGE SERVER. IMHO Exchange Server is one of the most productive and well thought out technologies ever created…I do everything in Outlook calendar, mail, tasks, etc. even on my Mac. So why can;t I tie that into iPhone and go buy two-three for me & my family? C’mon Apple and AT&T - get this done and widen your sales potential exponentially.

Posted By D-Bone, Seattle, WA : March 26, 2008 3:55 pm

the iphone SHOULD be called the yphone, as in “y the hell did i buy this phone?” i hate it. the touchscreen is impossible to use and the connection is terrible. whenever i see someone with a yphone, i judge them.

Posted By Brittany Fischer : March 26, 2008 1:39 pm

I have no idea what is microsoft up to!

MoiN
http://www.anewmorning.com

Posted By iwallpapers : March 26, 2008 1:23 am

Let’s be honest.. Apple makes a great products (because Steve Jobs is a total maniac) and MSFT makes apps that have to work with thousands of software and hardware providers - you may not like MSFT, but Apple doesn’t have the DNA to do what MSFT does and vice versa. MSFT could try to create apps in a closed environment, as Apple does, but it’s not the way the company is engineered, nor was it ever.

I’ve worked for Apple and now work for MSFT. I love my Apple gadgets, but in the end it’s MSFT that makes the world work (and money).

Anyway you slice it, without the hundreds of business apps that my new employer creates it would be a less productive business environment.

It’s just the way things are…

By the way - the truly evil company is Google… Not Apple, Not Oracle, Not SAP and not MSFT…

Posted By Dan D. Woodinville, WA (ex-Danville, CA) : March 25, 2008 10:12 pm

Like OMG! Look how old Tom Gibbons, head of M$’s Spectralized Devices and Applicators is!

We can’t allow old people to develop for the Mac. We’ll lose our cache of cool.

Posted By Onynx O’Flaherty, NYC : March 25, 2008 9:02 pm

Oh man, as a past president of the West Australian Mac Users Group and Mac power-user since 1985, I am embarrassed by the unbelievably knee-jerk anti-Microsoft comments by the Mac-extremists in this forum.

Put a sock in it will you guys - you’re giving the rest of us a very bad name. Sheesh.

Sure MS have their major problems and issues, but this development can only be a good thing as MS helps to reinforce the corporate credentials of the iPhone.

Please spare us the invective - it only gives the anti-Mac crowd like gibbs more ammunition.

Oh and about the $150 million investment MS made in non-voting Apple stock - Apple actually had $4 billion in the bank at the time so it was a gesture of support not a bail-out. -hh has it right that MS’s commitment with Office was the important issue at the time.

-Mart

Posted By Martin, Perth Australia : March 25, 2008 8:29 pm

This is great. MicroSoft will be totally beholden to Apple for any software they create for the iPhone as it must be sold through the Apps store and Apple will get a cut of the profits! (Although i guess MS could threaten to withhold Exchange compatibility or something.)

Also, MS only bought about $150 million of non-voting Apple stock way back when. That money was quite irrelevant as Apple still had billions in the bank and Jobs was back at the helm.
What was more important, was that MS promised to keep developing Office for Mac for at least 5 more years. That gave Apple a huge credibility boost in places where they were considering dumping Apple after their 12 years of unbelievable mismanagement by Scully, Amelio, et al.

Now, thankfully, the iPhone and the Mac can do quite well with or without MS, but if they happen to create a wonderful new version of Solitaire or something, Apple will benefit as well.

Posted By Synthmeister, Huntsville, AL : March 25, 2008 5:32 pm

dont worry, all this bickering about these 2 software giants, eventually 15-20yrs from now the international laws will change both entities will merge 2 form a monopoly so enjoy the rival symbiotic relationship of both for noww…

Posted By Juan Castro,Kgn, Jamaica : March 25, 2008 4:51 pm

@Smurfman
Regardless of the reasons, Apple only exists today because of Microsoft. And for the record, I think that both companies are evil. Read this month’s issue of Wired for a great look into Apple. Just as evil as Microsoft.

Posted By Bill, Los Angeles, CA : March 25, 2008 3:28 pm

@Bill:
OK, let’s remember Mac Fan-boys that the only reason that there is an Apple today is because of the cash infusion that Microsoft pumped into Apple in the late 90s. How soon we forget…

The $150M that MS got (in non-voting stock) was important to Apple, but not for what it represented as cash, for Apple had over $1B in the bank in 1997.

What the MS-Apple agreement obstensively was to settle infringements, what the real key of the agreement was was the promise by MS to continue to develop MS-Office for another 5 years, which provided confidence that the Mac platform would not be ‘orphaned’ due to a lack of Application software. Considering that Mac Office 98 shipped a mere 7 months later, its development was already underway at Microsoft, so the only reason to withhold shipping it was as a tool for leverage over Apple for a more favorable (to MS) settlement on the infringments. Afterall, given how much money MS has squandered away on various projects (IE, Zune, XBox, etc), it is clear that there’s factors other than merely profit that motivate MS to keep the Mac Business Unit operating, and given how lousy of a product Mac Office 2008 is, they shouldn’t be particularly proud, even if they are turning a profit.

-hh

Posted By -hh, Denville, NJ : March 25, 2008 3:17 pm

I can’t stand the Apple loving hippies. I love the MAC platform, but I love the Windows platform too.

Vista is far from crap and is by far the best operating system MS has ever shipped (with less problems than the ship version on leopard, that’s right, when you have a specific platform to develop for and can’t get it right, there is a problem. MS develops for ALL platforms)

I don’t see where the outrage comes from because MS wants to develop software. The initial development of Office on MAC (lest we forget $150 mil in non voting stock) saved Apple. That deal also made money for MS though, so win-win. MS will develop for iPhone/iTouch and we’ll all be happy. Another thing, why is it anti-competitive to bundle basic applications with an OS with Windows, but OSX comes with Safari, no? Quicktime? iCal? And Apple pushes the H.264 format far more than MS does with .wmv/.wma

Posted By Wesley, Tampa, Fl : March 25, 2008 3:11 pm

This fan-boy thing is so pathetic.

Posted By Jake, Miami, Fl : March 25, 2008 2:21 pm

And don’t forget Wondoze girls that there would be no Windows if Gates didn’t work for Apple early on and steal their ideas right out from under their noses. It was Jobs fault for trusting him though and the only reason Gates gave loaned money to Apple was to ensure Microsoft didn’t become a monopoly so the government wouldn’t split the company up like AT&T.

Posted By Smurfman Somewhere over the rainbow : March 25, 2008 2:15 pm

What is an iPhone? I am from the deep south and I have never heard of such macic.

Posted By Jeff, mobile Alabama : March 25, 2008 1:44 pm

OK, let’s remember Mac Fan-boys that the only reason that there is an Apple today is because of the cash infusion that Microsoft pumped into Apple in the late 90s. How soon we forget. Without that help, Apple would have gone bankrupt and would not have even been able to intro the ipod, the product that saved the company.

Posted By Bill, Los Angeles, CA : March 25, 2008 1:13 pm

@Greg and Larry
It’s 2008, not 1998. Bill Gates is retired and the iPhone is doing quite well without needing to license all it’s patents to Microsoft to survive.

@Realist
Spot on, brother. If you work in a corporate environment, this is good news. If you don’t need to use MS apps, move on.

@Asher Pat
What’s the weather like in Fantasyland?

Posted By Robb, Chicago IL : March 25, 2008 1:06 pm

Good. Some value will be added to mac poop that otherwise is only good as eye candy - sitting pretty on your table.
Of what value can be a machine like mac on which you cant even upgrade hdd or memory.

Posted By gibbs, washington dc : March 25, 2008 12:53 pm

“Always fun to read the moronic comments of Mac haters…”

There are no “Mac haters”, this is an invention of Apple supporters (yes, like supporters of a football club, that think that a commercial entity such as Manchester United is like some tribal honour of theirs or that it has some higher virtues). Apple supporters promote this bogey of “MSFT fan-boys” in order to justify they own urge to pad the pockets of Apple shareholders. But hey it’s a free world, you can do whatever you want!

BTW, a true definition of a “fan-boy”: “a person keen to promote the success of a commercial entity for no direct tangible benefit to himself”. Think about it a bit and will make sense.

So, will anybody in their right mind try to promote MSFT? It is a boring capitlalist company, so there are NO MSFT “fan-boys”. But AAPL? A shiny example of hippie anti-capitalinst underdog chick that any poseur wants to be assoviated with.

Posted By Asher Pat, London, UK : March 25, 2008 12:37 pm

Apple has already licensed Active Sync from Microsoft and it works WONDERFUL with the native, Easy to use, uncluttered mail and calendar package already on the iPhone. Steve Balmer was laughing at the iPhone 6 months ago and now its a big push to see if they can write software for the platform. iPhone has in 6 months already blown passed windows mobile in market share. When iPhone 2.0 comes out RIM is in trouble. That’s not an accident. I smell fear. What this world does NOT need is More Microsoft.

Posted By Ed, Parsippany NJ : March 25, 2008 12:01 pm

This does not suprise me at all. Microsoft has always been a poor follower and a lousy innovator.

Posted By Bill Gates. Redmond WA : March 25, 2008 11:35 am

Companies scope competitor’s products all the time.

Those who say RIP MSFT because they are checking out the iPhone SDK has no understanding of business/comp/product analysis. It would be stupid to not assess free dev kit from a competition (a la AAPL doing the same for MSFT SDKs.)

It would be like saying RIP AAPL for making Safari available for Windows. Huh, they must be in the throes of desparation if they have to make it available on their archrival’s OS. That would make no sense like most of the Apple fan boys’ said comments.

Posted By Frank LA CA : March 25, 2008 11:28 am

Apple desperately needs Microsoft’s applications for the iPhone in order to save that platform. Microsoft, in return (and to continue to allow Exchange connectivity on the iPhone), will demand and obtain a license to all the patents Apple has on the iPhone. Then Microsoft will incorporate amazing new innovations into Windows Mobile platform and a couple of years later all of its products will seize to function properly on the iPhone.

Posted By Larry, Irvine, CA : March 25, 2008 11:15 am

Sometimes, it is sad how people fight over something so small. Seems like some people should get out more.

Posted By rrt, concord,nc : March 25, 2008 11:09 am

One word….”Vista”

Posted By ?, Rapid city, SD : March 25, 2008 11:05 am

I can’t believe that anyone at Microsoft is really looking to mess with the iphone. They should really fix PPC 5 or 6 and get it together in that platform, before trying to ruin another, with more issues than they can handle.

Posted By Carlos, Durham, NC : March 25, 2008 11:03 am

It goes to show you that Bill Gates is no longer the wiz kid he was 30 years ago, when he feels threatened by someone’s success. Hey Bill all that money and technology won’t help you live for ever so that you can control the industry. In the next 10 years Microsoft will start to lose it’s grip and it will be just another software company. After dealing with them and their technology for the last 20 years the writing is just stating to show up on the walls. RIP Microsoft.

Posted By Greg, Pal Park, NJ. : March 25, 2008 10:58 am

Microsoft developing for the iPhone would help Apple’s credibility with enterprise IT and Microsoft would benefit from an open platform alternative to RIM.

Posted By Arnold Reinhold, Cambridge, MA : March 25, 2008 10:54 am

“In fact, the software giant is probing the gadget for profit opportunities.”

Don’t you mean “imitation opportunities?”

Expect a ZunePhone in the near future. And expect it to be amazingly similar to the iPhone.

Posted By The Freedom to Innovate (Har), Redmond, WA : March 25, 2008 10:47 am

Always fun to read the moronic comments of Mac haters…

Posted By John, SF, CA : March 25, 2008 10:40 am

I don’t mind seeing Microsoft produce stuff for the iPhone. One good thing about the Mac is that there’s frankly more competition for ‘office-like’ products, with many people using iWork and others using NeoOffice. The recent MS Office for Mac release is uninspiring, and the loss of VB scripting will have a negative impact on cross platform document portability.

I routinely get documents that crash MS Office on the Mac that I open in either iWork or NeoOffice (using the -older- formats, not the new OOXML stuff… ;)

The iPhone produces a new -level- playing field for these products, may the best product win!

Posted By David Emery, Reston VA : March 25, 2008 10:38 am

Always fun to read the whiny comments of MAC lovers…

Posted By U, San Diego. : March 25, 2008 10:18 am

I won’t be surprised that most of these negative comments came from a Window PC. If it weren’t for Microsoft, we would still be licking our stamps to mail in our comments.

Posted By Alex, San Francisco, CA : March 25, 2008 10:14 am

You are all in a “Mac Daze”…You are so caught up in the Mac vs. Microsoft saga that you fail to see that this is a great opprotunity for both companies…and in the end, only good can come from this because you don’t have to use any of the applications if you don’t want too…It is just added options.

Posted By Realist, New York, NY : March 25, 2008 10:14 am

Leave it to Microsoft to trying and bring a gargantuan suite like Office to the iPhone and completely killing the UI & performance.

Posted By Venkat, Chicago IL. : March 25, 2008 9:45 am

Here comes Microsoft to ruin yet another piece of hardware. It’s a good thing iPhone apps will be optional. If I don’t want Microsoft’s crap on my iPhone, I don’t have to put it on there.

Posted By T, South Bend, IN : March 25, 2008 9:43 am

Let the FUD campaign begin. Scare away smaller developers by pre-announcing nothing but intent to develop something.

Posted By scarecrow : March 25, 2008 9:32 am

Microsoft “goodies”..? -What’s that??? There’s an oxymoron if I ever heard one. They can’t even get their own software right.

Posted By tammy : March 25, 2008 9:23 am

Just like Microsoft- take other people’s hard work and use it to save yourself from self destruction. Microsoft is one of the WORST companis who makes an outright POS operating system that we are all stuck with at work because companies are morons.

Posted By MS sucks, Everywhere, US : March 25, 2008 9:12 am
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Jon ForttA senior writer for Fortune, Jon Fortt focuses on technology and innovation in Silicon Valley - a subject he's been reporting on since his days as a rookie reporter for the Lexington (Ky.) Herald-Leader. Before joining Fortune in 2007, Jon had reporting and editing stints at Business 2.0 magazine, and the San Jose (Calif.) Mercury News, Silicon Valley's hometown newspaper.
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