Last week, Microsoft (NASDAQ:MSFT) announced its acquisition of Nokia’s devices and services division for $7.2 billion. Microsoft’s mobile device offering both in tablets and smartphones has been weak compared to industry incumbents such as Google and Apple. Having missed out on the growth in global mobile market, Microsoft plans to reinvigorate its mobile device strategy by supplementing its hardware division through this acquisition.
In this article, we look at these opportunities. Additionally, we will also look into Microsoft’s Windows ecosystem and how this can be instrumental in the increasing sales of smartphones.
Target Sales in Emerging Markets
Global smartphone shipments are on the rise and set to surpass one billion unit mark this year.  High smartphone growth is the result of a variety of factors including steep device subsidies from carriers, especially in developed countries, as well as a growing array of sub-$200 smart phones. Additionally, IDC forecasts smartphone shipments to grow to 1.7 billion by 2017.
Unlike developed countries where smartphone penetration is above 50%, it is below 25% in many developing countries. While the adoption of smartphones in developed countries fueled the first wave of global growth, strong demand in emerging markets will drive the next phase. Currently, the sale of sub-$200 smartphones is prevalent in emerging countries, and we believe with the availability of more cheaper options, the smartphone penetration can rise.
Nokia still has a sizable share in the mobile phone market in emerging economies. Additionally, it has launched Windows based smartphones such as Lumia 520 for emerging economies that cost less than $175. Nokia’s brand name is still widely recognized in these countries, and we believe that Microsoft can leverage this to push sales of windows smartphones in these countries. By foregoing the Windows phone royalty margins, Microsoft can subsidize the price of smartphones by at least $10, that can in turn boost the sales of Nokia smartphones. Currently, Windows phones’ share in smartphone market is 3.9%, and it is expected to grow to 10.2% by 2017.  If Microsoft can increase its market share to 15% by launching cheaper smartphones, it can generate $35 billion in revenues by 2017.
Target Enterprise Clients
The recent implosion of Blackberry has left a yawning gap for smartphone manufacturers who can address the needs of security sensitive enterprise client. Microsoft can make security a standout feature for smartphones running on the Windows Phone OS. The company has recently released a security feature pack for Windows Phone. This includes technology for signing and encrypting email, lock down functionality for more enterprise control and automated triggering of virtual private networks at the app level.  With the hardware unit under its control, Microsoft can roll out a tightly integrated smartphone that can offer chip level security to enterprise clients.
Globally, many companies have Window PCs installed across their offices. We believe that Microsoft can leverage these existing ties with its enterprise client to sell more smartphones. Additionally, these enterprises run ActiveSync, a Microsoft app released in 1996 to synchronize data between mobile devices and desktop computers, for mobile device management and security. The company can exploit this to pitch its smartphone to its enterprise clients.
Support Development of Windows Ecosystem
We believe that apart from being a money maker, app stores also drive smartphone sales. While the iOS and Android based smartphone ecosystems continue to rule the market, Windows-based phones have been gaining some traction thanks to Microsoft’s partnership with Nokia. With over 900,000 active apps, the Apple Store raked in over an estimated $5 billion in revenues from app sales in 2012.  Google Play currently has over one million active apps and revenues have increased by over 67% in the last six months. 
In Q2 2013, Windows’ share in the worldwide smartphone operating system market grew to 3.7%.  Moreover, Nokia shipped over 7 million Windows smartphones, outselling Blackberry and gaining over 10% market share in nine markets.
However, Windows 8 kernel based devices, which includes PCs, tablets and windows phones, have failed to gain traction among customers and OEMs alike. This has negatively affected the growth and development of the Windows ecosystem. Developer community has shied away from developing Windows phone apps as the return for it is not compelling. As a result, Windows Phone store has 170,000 apps, which is only a fraction of what is available on Android and iOS. Through this acquisition, Microsoft aims to accelerate its growth in market share through faster innovation, increased synergies, and unified branding and marketing.
If Microsoft can grow its sales of smartphone units, this will grow the Windows architecture user base. Moreover, it can earmark a small fraction of its considerable cash reserves, to fund and support the Windows 8 app development platform with a focus on mobile app development. Microsoft’s own applications – from Xbox to Office can further supplement app development program, which would be a meaningful step up for Windows Phone store.
A stronger Windows Phone OS, with better apps and developer support, could make Windows ecosystem the third platform behind Google’s Android OS and Apple’s iOS. This may help convince customers to persist with Windows PCs and tablets. This can incentivize app development and create a sustainable and profitable ecosystem for developers and users to thrive in.
We have $41 price estimate for Microsoft, which is approximately 30% above the current market price.
- Worldwide Mobile Phone Market Forecast to Grow 7.3% in 2013 Driven by 1 Billion Smartphone Shipments, September 4 2013, www.idc.com [↩] [↩]
- Making Windows Phone an even better choice for business, July 10 2013, blog.windows.com [↩]
- Trefis Apple estimates [↩]
- Top Global Apps July 2013, August 12 2013, www.destimo.com [↩]
- Apple Cedes Market Share in Smartphone Operating System Market as Android Surges and Windows Phone Gains, August 7 2013, www.idc.com [↩]