Steve Ballmer literally laughed at the iPhone when it came out in June 2007, telling USA Today, “There’s no chance that the iPhone is going to get any significant market share. No chance.”
He’d quit laughing by the time Google Android hit the market in September 2008. By then, he had his developers racing to develop Windows Phone, but by the time it came to market in October 2010 they were nearly three years too late — a mistake that cost Microsoft the mobile market.
The combination of timeline & market position are critical to understanding how Microsoft lost this race. If things had gone just a little bit differently, today’s world would be a very different place. Here’s why:
How Microsoft Grabbed The PC Market
Back in January 1984, Apple released the Macintosh, a revolution in personal computing that featured a mouse-driven GUI and all the familiar features of today’s PC. It made computing accessible to anyone — but not everyone could afford it. With a price tag of $2,495 (over $6,000 in today’s dollars), it was simply too expensive for most families and even a lot of small businesses to buy.
Bill Gates realized that Apple wasn’t serving the entire market, and jumped on the opportunity by releasing Microsoft Windows over a year later, in November 1985. Windows, paired with an inexpensive IBM “clone”, did nearly as much as the Mac, but for half the price.
It wasn’t long before Windows dominated personal & business computing so completely that it very nearly drove Apple out of business in the 90’s. Ironically enough, it was Microsoft itself that bailed Apple out financially in 1997, prompting Steve Jobs to publicly thank Bill Gates — and simultaneously planting the seeds for Microsoft’s future downfall.
Apple Creates Modern Mobile Computing
They say that a tiger doesn’t change its stripes — so it’s no surprise that when Steve Jobs launched the iPod in 2001, it was again a revolutionary but expensive product positioned for the premium market. There were several MP3 players being sold at the time, but the iPod was the most stylish, and over the next few years it was natural for 2001's iPod to evolve into 2007's iPhone.
At this time, back in 2007, Microsoft was still “king of the hill” in terms of computing. They were dealing with fallout from Windows Vista performance & security issues, busy making inroads into corporate data-center servers, and simply didn’t take the iPhone seriously.
As Steve Ballmer famously said in that 2007 USA Today interview, “Would I trade 96% of the market for 4% of the market? I want to have products that appeal to everybody.” Microsoft was on top, making deals so big that creating a new “smartphone” wasn’t even on their priority list. When Jobs rolled out the iPhone, Steve Ballmer’s biggest concern was making sure that his 85 year-old uncle bought a Zune media player.
History Repeats Itself: Almost
Just like the launch of the Macintosh back in ’84, the iPhone created massive market demand, but was too expensive for the average user. By creating an inexpensive mobile operating system for mid-market hardware, Microsoft would be positioned to capture the bottom 90% of the market that Apple wasn’t serving — but Microsoft didn’t. Google beat them to it.
Two years after Apple had successfully proven the market need for smartphones, Google released the Android operating system, and it wasn’t just inexpensive — it was free. That left Microsoft with no marketshare, and by the time they got Windows Phone to market, developers were already busy filling up the app stores for Android & IOS. Microsoft had difficulty finding hardware manufacturers, and an even harder time finding apps for a mobile operating system with no users.
Instead of history repeating itself, it was game over for Redmond — the lack of hardware, apps & product momentum left them effectively locked out of the mobile device market, and Windows Phone struggled to find traction until Microsoft eventually discontinued it in 2017.
What Did Microsoft Miss?
Let’s break this down. Steve Jobs was brilliant, but it doesn’t take a genius to realize that combining the iPod’s media & internet features with phone functionality at price tag of $499 would easily displace the market-leading Moto-Razr flip phone, which sold for $450 at the time.
Next there’s Google. By 2008 they’d already exceeded $21 billion in annual revenue, but it was entirely dependent on other company’s browsers & operating systems— a weakness they were keenly aware of. The launch of the Chrome browser in September, followed by Android in October of 2008 was a big step in securing their revenue stream.
Finally comes Microsoft. Why so late? Back in 2007, Redmond was busy launching the long-overdue Windows Vista and making record profits with enterprise sales & Xbox consoles. Ballmer’s response to USA Today indicates that he viewed the iPhone primarily as a media-focused information appliance, making it a niche market product that was easily overlooked.
The Only Constant Is Change
What Redmond failed to realize was that for literally billions of people around the world, a web-enabled smartphone is an alternative to a traditional PC, which meant that the niche market went mainstream — and the growth of mobile computing came at the cost of traditional desktop/laptop systems.
Losing the mobile market was a major setback for Microsoft, but it’s a cloud with a silver lining. Humbled by their failure, Microsoft went through a period of soul searching & organizational transformation that led to new products, markets, and revenue streams — ultimately benefiting the consumer as they began to embrace SaaS models, cloud computing, and other advances.
Through hard work, flexibility & perseverance, Microsoft regained its stature in computing, and by 2018 the Redmond giant was running neck and neck with Apple for the enviable title of “the world’s most valuable company.”