Windows Phone's Problem Isn't Number Of Apps

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I recently read an article by Eric Volkman on Fool.com where he suggested that an application for Microsoft's (NASDAQ: MSFT) Windows Phone software could potentially make this upcoming ecosystem more relevant. This program called App Player, by privately held BlueStacks, he said could be a reason to consider Windows Phone as the potential "third ecosystem." App Player essentially makes it possible to run Android apps on Windows Phone software. His comment echoes something that I've heard many people say before, and that is, "the Achilles' heel of Microsoft's Windows Phone environment is it simply doesn't have enough apps.” While I respect Eric's writing, on this one he and I will have to agree to disagree.

Disrupting The Smartphone Industry Isn't as Easy as it Once Was:

Microsoft's main problem with mobile has much less to do with the number of apps available, and much more to do with the fact that dominant players don't lose their position unless they completely ignore consumer trends. I know that some people would point to Research in Motion (NASDAQ: BBRY) as a counterpoint to my argument. However, RIM essentially led the smartphone revolution, but then sat idly by as both Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) created stronger ecosystems. Both companies realized that consumers were open to the idea of touchscreen phones long before RIM. Apple created both the hardware and software, and offered features that RIM refused to acknowledge would be important to their end users. Google on the other hand, partnered with multiple hardware manufacturers to create new designs and improve the user experience through an open source community. Some people would say another disruptor could come along and unseat Apple or Google, but the smartphone industry is no longer in its infancy. Unfortunately for Microsoft, the industry has changed, and it has become even more difficult for a competitor to step in and take market share from the leaders. 

Smartphones are More Commonplace:

Many people assume that the number of apps will determine what ecosystems users will choose. While this is partially true, there are multiple other factors to consider. First, the difference between years ago when RIM began to lose market share and today is smart phones are no longer the novelty that they once were. According to CNET, about 234 million people in the United States over the age of 13 already own a mobile phone. While not all of these phones are smartphones, according to a recent study, "more than half of Americans own smartphones." In addition, in the second quarter of this year about 70% of new phone activations were smartphones. This is astounding growth considering that in 2009 only 18% of new activations were smartphones. The point is, with more than 50% of the marketplace already using a smartphone, and this trend increasing, the battle for this market has largely been decided already.

People Buy What Their Friends and Family Like:

Whether people like to hear this or not, many customers looking for a smartphone look first at what their friends and family are already using. There's probably no greater force behind product choice than an individual's family and friends input. When you think about this, it makes a lot of sense as a potential customer can try out products that their friends and family use before making the purchase themselves. This is both good news and bad news for the players in mobile operating systems. As of July of this year, Android controlled 52.2% of existing smartphones, with iOS coming in second at 33.4%. RIM and Microsoft placed third and fourth with 9.5% and 3.6% of users respectively. While some would argue that Windows Phone 8 could begin to take market share from the leaders, there are two primary reasons this might not happen.

Switching Ecosystems is Less Likely Than Before:

One of the reasons that Apple and Google boast the most apps is, because their customer base is growing, and developers follow customers. One problem in getting a customer to switch is, they have to be dissatisfied with their current situation. This doesn't appear to be happening in the Android and iOS systems. While both of these ecosystems show market share that differs month to month, they are generally both stealing market share from each other and from the other players. What has not changed in many months is the two top systems, Android and iOS consistently stay in the top two spots. In addition, application retention rates have been improving. In particular, "iPhone and iPad users are 52% more loyal to their apps than Android users." A J.D. Power smartphone satisfaction survey found that Apple ranked first and HTC ranked second, as the only two manufacturers to rank above the industry average.

Following behind these two companies in order of satisfaction were: Samsung, Motorola, LG, BlackBerry, and Nokia. While it's certainly possible that these rankings would change if customers were asked today, it seems very unlikely that Apple would lose its higher customer satisfaction ranking with the introduction of the iPhone 5. The next three companies (HTC, Samsung, and Motorola) all specialize in Android powered smartphones. In fact, you could make the argument that if Microsoft hopes to win as a third ecosystem they must convince HTC and Samsung to make a heavy push with Windows Phone 8. Even if this occurs, there is another factor that will cause customers to stick with their existing setup.

The second reason that many customers won't switch to a new ecosystem has to do with the cost of switching related to the apps on their existing phones. While it's true that many popular apps are free, it's also true that these free apps in many cases have in-app purchases enabled. If a customer has made in-app purchases on an Android powered phone, it's highly unlikely that they will abandon these purchases to switch to another system. It is even less likely that a customer will switch if they've paid for apps. Having to re-buy the same apps on a new system is just not something that most people would consider.

Conclusion:
In the final analysis, in order for a major change in mobile operating systems to occur, there has to be serious dissatisfaction with the existing leaders. Apple clearly has a lead in both satisfaction with their hardware and the retention rate of their apps. While Android carries a larger part of mobile operating system users and their retention rate has increased as well. It's also hard to imagine why hardware manufacturers would choose to pay to license Windows Phone 8 when they can continue to develop around Android for free. If you are Microsoft, you have to hope that users are so impressed with Windows Phone 8, that they want to switch even with all the barriers to switching that exist. Given the proliferation of smartphones, Microsoft won't unseat either of the two leaders just by winning new customers. The company has to convince existing customers to make a switch. To be fair, I do believe that Microsoft could be a good value at these levels, but that is based on PC and enterprise demand. Betting that the company will come and better than third in mobile operating systems seems very unlikely.

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MHenage owns shares of Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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