Microsoft's Eventual Smartphone Success
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Microsoft’s (NASDAQ: MSFT) mobile operating system Windows Phone has not been a resounding success. In fact with about two percent of the smartphone market after roughly two years on the market and a significant marketing budget Windows Phone has been quite a flop. However there is more than just Windows Phone to Microsoft’s mobile business. At the moment there is another aspect of Microsoft’s mobile business that is making it a success; royalties. In the near future it will be yet another aspect of Microsoft’s mobile business that will make it successful; Nokia (NYSE: NOK). And in the long run it will finally be Windows Phone’s turn to make Microsoft's mobile division a success.
It was rumored in 2011 that Microsoft paid over a billion dollars for a five year deal with Nokia that had Nokia dropping its own smartphone operating system and adopting Windows Phone. This deal has yet to bear fruit, but Microsoft is making bank from one smartphone operating system; Android. After suing many Android handset makers over intellectual property violations in Android, Microsoft has reached several highly lucrative royalty deals. The vast majority of Android handset makers (HTC, Samsung, LG and others) have reached licensing deals with Microsoft and it's estimated that Microsoft is earning 1-5$ per android device sold under these deals. According to an estimate by Goldman Sachs this could earn Microsoft $444 million in 2012, just from royalty deals. At the moment it is these royalties and the likelihood that they will continue that is making Microsoft's mobile business a success.
A little out into the future, another factor will come into play that will increase the success of Microsoft’s mobile division. This is when the Nokia deal will begin to pay off for Microsoft. Nokia has already launched a number of Window’s phones most notably the Lumia 900. These recent launches from Nokia have given the world the best Window’s based smartphones yet. They also have a more unique design than most Android phones and they are competitively priced (the Lumia 900 is $99 on contract).
The hardware specs of the current generation of Windows phones are not quite up to what Android is sporting and Windows phone doesn’t have the ubiquity on every carrier that Android does. These two issues will both change as Nokia launches more phones and a new version of Windows phone is launched that supports better hardware. This stage in Microsoft’s mobile strategy will likely happen around the end of 2012 and early 2013 as Microsoft continues to rake in profits from royalties. Nokia will have had time to release enough Windows phones, on enough carriers, at enough price points as to make Windows Phone a widely available competitive platform.
Finally after the royalties and Nokia do the heavy lifting, we will reach the point where Windows Phone will take market share away from both Android and iOS. Microsoft will have an operating system that functions just as well as the competition, but uses a unique interface that differentiates the operating system well and appeals to many users. They will also have a premium hardware maker in Nokia who for the first time will be a major player in the US smartphone market. Microsoft will have a number of additional hardware manufacturers producing Windows smartphones as an alternative to their Android phones like Samsung, HTC and LG.
Windows Phone is a more controlled environment than Android meaning that it will not suffer from as much fragmentation as Android. Manufacturers are not allowed to alter the User Interface of Windows Phone meaning that whatever Windows smartphone you use it will work just like all Windows phones, unlike Android where every manufacturer has its own User Interface skin and bloatware they insist on bundling with their phones.
Though at the moment Microsoft may not look very successful in the mobile arena, except when you compare them to say, Palm. Microsoft clearly has not had the out of the gate mobile success that its competitors Google or Apple have enjoyed, but do not count them out. Microsoft has put significant resources into making sure that they will be a player in the smartphone world. Hundreds of millions in royalties, a billion dollar exclusive partnership with Nokia, and eventual ubiquity combined with additional hardware makers will see Windows Phone as one of the largest players in the smartphone market.
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