Why Microsoft became attracted to Danger

Redmond, Wash.-based Microsoft Corp.’s plan to acquire mobile technology developer Danger Inc. will grant the software mogul the brand recognition it seeks in the youth market, analysts said.

Microsoft is aggressively trying to grow in markets it deems to be high growth, as was also seen with the Yahoo! Inc. offer to enter the online services space, said Kevin Restivo, senior research analyst for software with Toronto-based IDC Canada.

“It says that Microsoft is more willing than ever to buy companies in areas where it wants to have a bigger presence,” he said.

The acquisition of Danger should help Microsoft broaden its consumer appeal in light of the popularity of offerings like social networking services, Web browsing, and real-time mobile messaging, said Scott Rockfeld, group product manager for mobile communications with Microsoft. “Danger appeals to the young adult and teen market,” he said.

The company intends to incorporate Danger’s assets with those of Windows Mobile, he said.

Alongside gaining a “great brand” in the youth space, Restivo said the Palo Alto, Calif.-based company brings good software designers and user interface capabilities – of which the latter will be beneficial to Microsoft in light of challenges it has had with mobile device user interfaces.

“If they layer [those assets] on to Windows Mobile, they’ll have a much more powerful device that already has a following in the market,” said Restivo. He added that those were the primary drivers behind the acquisition, considering the companies’ very different approaches to mobile computing.

In turn, he said Microsoft can improve the problems with Danger’s Sidekick device. He said that if Microsoft continues the Sidekick product, it will eventually be powered by Windows Mobile.

The two companies would face a challenge integrating their mismatched operating systems if they chose to take that route, said Jon Arnold, principal with Toronto-based J. Arnold & Associates. given that Dangers’ is proprietary and doesn’t support third-party developer applications, “it wouldn’t fit very easily with Microsoft’s system, so there’s a challenge there, but I’m sure they’re going to figure it out.”

Arnold said he guesses Microsoft will integrate the good pieces – in particular the user interface – of Danger’s operating system into its own. Microsoft intends to combine the best assets across both platforms, said Rockfeld, while also acknowledging that “some of the details are to be worked out.”

In fact, Microsoft may have the superior operating system, but not “a killer product that people would buy,” said Arnold. “Danger could potentially become the platform for that.”

The move may have, in part, been to remove a potential competitor from the mobile market, said Arnold. “The DNA of Danger goes back to the guy who built Android for Google.”

Different operating systems aside, Microsoft likely didn’t want rival Google Inc. to acquire Danger after initiating an IPO last December, agreed Mark Tauschek, senior research analyst with London, Ont.-based Info-Tech Research Group. However, he added that Danger hadn’t yet made a significant penetration nor turned a profit in the mobile market, except for the headway gained by T-Mobile Sidekick.

But depending on how Microsoft handles the acquisition, the move should be a good one, said Tauschek – specifically it may want to avoid immediately porting Danger’s technology to the Windows Mobile platform, otherwise it could “break it badly if they tried to do it too quickly.”

The acquisition was probably a small price for Microsoft and “is a relative pittance when you consider the advantage of keeping it out of competitor’s hands,” said Restivo, adding that removing Danger from rival vendors’ grasp was but a benefit, not the primary driver.

Tauschek said although Danger’s customer base, which he described as “relatively loyal”, has shown mixed emotions over the deal, they are relieved for the infusion of capital the company will gain to maintain and improve offerings. But the concern is that, he added, Microsoft will port the platform entirely to Windows Mobile.

The move by Microsoft, Arnold said, certainly complements its recent Telco 2.0 roadmap – a plan detailing its presence in this new era of operator services that bring together applications and content from different sources to form composite services – to provide an operating system and advanced user device to enter the consumer space.

Danger is not a huge buy for the company, said Arnold, but it will help fill the gap in the mobile communications space, to supplement the “touch points for the consumer market” that it already has.

However, he cautions that there remain many uncertainties around how the technology will work and which standards it will support.

Arnold expects to observe the big players making defensive moves like this one to garner hardware and software experience in the consumer space, especially in light of fast-growing technologies like the Mobile TV, a television service offered through mobile telecommunications networks. “Microsoft knows this as well. They’ve got to be in the game.”

But specifically in the Canadian mobile space, the analysts agreed that the buy would have little immediate impact. Besides, there are currently no Canadian wireless carriers doing business with Danger, said Tauschek.

Restivo speculated that a Microsoft-Danger partnership could offer the Smartphone in Canada, bolstering its presence in the youth market.

According to Rockfeld, despite Canada’s heterogeneous landscape of wireless standards, Microsoft “will be able to extend the reach of the Danger technologies to millions more customers.”

Although Danger is designed to work on all mobile operator networks, he said it is currently only available on GSM/GPRS voice data networks.