The curious case of the Z100: Microsoft is accused by UK firm of tapping into its secrets

This tale of corporate intrigue and back-stabbing could make a fine novel; a brilliant British company with international expertise is befriended only to be betrayed later by a giant corporation that wants to suck it dry.

Except that it's not a tale: according to Sendo, a company based in Birmingham that specialises in developing mobile telephones, this is what happened when Microsoft moved into the market.

Sendo, which was formed in 1999, thought that all of its problems had been solved when, in February 2001, the software monolith Microsoft bought less than 5 per cent of the company for $12m (£8m), valuing it at more than £160m. Microsoft was given a seat on the board in return. But Sendo alleges that this was the start of the betrayal – and that the Microsoft man sent to work with it was a traitor.

In a 27-page filing in a Texas court, near the company's US subsidiary, Sendo accuses the software monolith, based in Redmond, Washington, of "misappropriation of trade secrets, common law misappropriation, conversion, unfair competition, fraud, breach of fiduciary duty, negligent misrepresentation (twice), breach of contract (twice), fraudulent inducement and tortuous interference".

What Sendo is claiming is that it was misled by Microsoft, which promised that it wanted to develop mobile phones together, but instead took its trade secrets and used them behind its back to produce phones by itself. The added kicker is that if Sendo goes bust as a result, Microsoft will own all the rights to the work.

Sendo wants damages of "hundreds of millions of dollars" from Microsoft, which declined to comment on any of the allegations yesterday. A hearing is expected by the end of the month, though the case could drag on for a year.

"Are we gloomy or angry?" said Marijke van Hooren, Sendo's spokeswoman. "Well, it was a difficult decision [to withdraw from the Microsoft project] ... We spoke to all the staff, and they understood it was a business decision. And the next day we started work on a new product." That was one not based on Microsoft software. But as a result "we've lost about a year of development time", Ms van Hooren said. Sendo reckons it has lost a revenue stream that could have been worth £200m annually.

But why would Microsoft, which makes billions of dollars of profits from computers, want to get into mobile phones? David Birch, managing director of Consult Hyperion, which specialises in mobile commerce, said: "Mobile phones already include Sim cards, and a certain inbuilt level of security, so there's some pressure to make them a platform for e-business and even e-government.

"For a lot of people, it would be more convenient to use a phone than a PC. So looking ahead, providing the software for the mobile phones means controlling the infrastructure – it's not just a question of getting 10p for the operating system for every phone sold."

Observers suggest that dominating that market in the way that it controls the computing desktop could make Microsoft rich all over again as a "gatekeeper", able to charge developers to write software that works and is certified for use on its phones.

The industry has always found Microsoft to be a ruthless competitor. For 20 years, companies including Digital Research, Wordperfect, Spyglass, Stac Electronics and, most glaringly, Netscape have discovered that Microsoft always plays hardball while they play by the Queensberry rules.

"Writing programs for Windows is like becoming a dentist for a Tyrannosaurus rex," quipped Wil Shipley, president of the software company Omni Development. "Sure, the market is big. Lots of small programmers have a vision that working with Microsoft is like being one of those little toothbrush birds for crocodiles – the crocodile is the one eating the zebras and gazelles, but there's plenty of crumbs left in the cracks between his teeth.

"But both Microsoft and the king of dinos are vicious carnivores, and both will snap their jaws shut as soon as share their leavings with you ... it's all meat to them."

When Microsoft turned its eyes to the mobile market, phone manufacturers had learnt the lessons of history – and were unwilling to be reduced to following the fate of PC manufacturers, who scrabble for profits on commodity hardware while Microsoft creams monopoly profits on software.

So they have stuck together, co-developing their own operating system for phones called Symbian, which is made available to companies that want to develop phones for them.

Microsoft's answer is its "Smartphone 2002" or "Stinger" operating system. Publicly, the plan was that Microsoft would provide Sendo with the "Stinger" code and Sendo would use its knowledge of phones' hardware, and manufacturers' and providers' preferences, to produce a Microsoft mobile phone – the Z100.

In February 2001, the provisional launch date was August. But it slipped again and again. Sendo programmers are understood to have been annoyed first at the many flaws in Microsoft's code and then at the restricted access Microsoft imposed on it. Then, Sendo claims, information started flowing the other way. It alleges that from May 2002, Microsoft began "aggressively demanding" technical and commercial information about the phone.

Sendo says Microsoft told it to stop any development work not concentrated on the Z100, and asked for a test run of 300 prototypes – a tall order for a small company. And at the suggestion of the Microsoft executive appointed to Sendo's board, the £8m Microsoft "investment" had been converted into a repayable loan; yet payments from Microsoft slowed down, hurting cashflow. Finally, early in November 2002, with the official Z100 launch just weeks away, Sendo announced that it was ceasing development with Microsoft and talking instead to Nokia and Symbian.

But Microsoft does have a phone on the market – the SPV, made by a Taiwanese company, HTC, and sold on the Orange network in the UK.

Sendo suspects that its expertise was being funnelled to the company making the SPV.

But there's more. Sendo says that one of the Microsoft executive's last acts before resigning from the board, on 28 October, was to suggest that the company could escape from its obligations to repay the Microsoft loan by declaring bankruptcy. But then Sendo noticed a clause in the agreement with Microsoft: if Sendo goes bankrupt, Microsoft gets all the rights to the work Sendo had done on the Z100.

Sendo is soldiering on.But it is unclear whether it will survive long enough to see the legal action concluded.

PLAYING TOUGH

WORDPERFECT
In the mid-1980s WordPerfect was dominant in the word-processing market. Bill Gates calculated how much market share Microsoft's rival Word program had to gain to disable his rival's cash flow. The magic figure was 5 per cent. By dint of wild promotions (at huge cost) Microsoft hit its target. WordPerfect crumbled.

STAC ELECTRONICS
In 1993, sued Microsoft, alleging that it had including its "Stacker" technology for compressing files without permission in MS-DOS 6, the precursor to Windows. Microsoft lost.

SPYGLASS
In 1995 Netscape pioneered Web browsers for the rapidly-growing World Wide Web. Microsoft bought in the basic code for a browser from a company called Spyglass, and used it to create its own Internet Explorer browser. It promised to pay Spyglass a percentage of any sales that resulted. To undercut Netscape, priced at $35, Microsoft then gave away Explorer for free. Spyglass got no sales percentage.

NETSCAPE
In April 2000 Microsoft was found guilty of breaking antitrust laws by using its Windows monopoly to distort the browser market. However, the US Department of Justice watered down its punishment; rather than being split into two companies, Microsoft was essentially told to be nicer in future.

SUN
The Java programming language, developed by Sun Microsystems, was first released in 1996, and intended to break the Windows monopoly. Programmers could write once in Java; the programs would then run on any operating system. Microsoft decided to "embrace and extend" Java – adding idiosyncratic elements so that Java programs written on Windows would only run on Windows.