Why Is Windows 10 Launch In July ’15 Vital For Microsoft?
Microsoft (NASDAQ:MSFT) announced that it will release Windows 10 on July 29th. [1] Furthermore, it said that the OS will be a free update for users running Windows 7 or Windows 8.1 on PCs or notebooks for the first year. In the initial phase, the adoption among beta tester was strong; however, it remains to be seen whether it will gain traction with general users.
Since the company’s suite of products and devices are more or less dependent on the usage of Windows OS, we think that the way it fares over the ensuing months will be key for the health of Microsoft’s business, in 2015 and beyond. In 2015, we will specifically be looking at whether Microsoft’s overall market share among consumers and Windows 10 help the company influence consumers in their purchases of phones, especially in emerging markets.
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Is Windows 10 Release Vital For Windows OS Division?
Windows Operating System is Microsoft’s third largest division and makes up 9.7% of its stock value by our estimates. However, it contributes 25% to Microsoft’s top line. One of the primary drivers for Microsoft’s Windows division is global PC sales. Approximately 65% of total Windows Division revenue comes from Windows operating systems purchased by original equipment manufacturers (“OEMs”) and pre-installed on their devices. [2] According to IDC, global PC sales continue to decline and global shipments were down by 6.7% in Q1. [3] IDC also expects that PC sales will continue to decline by 6.2% in 2015. [4] Currently, we forecast that global desktop sales will decline by 5% to 130 million and the global notebook market will remain flat at 180 million units shipped in 2015.
The company has offered the free Windows 10 upgrade to existing users of Windows 7, Windows 8 and Windows 8.1. We believe that this will help Microsoft stabilize its market share in the OS industry. However, since it is offering Windows 10 for free for the first year of its launch, Microsoft might not report a substantial increase in revenues from this division. The biggest question in the coming months is what strategy Microsoft plans to implement to improve the top-line and bottom-line. It remains to be seen if pent-up demand for PCs prompts an increase sales in the latter half of the year.
Focus On Phones And Emerging Markets
One of the primary reasons for the decline in PC shipments has been the increased popularity of tablets. According to Gartner, tablet shipments exceeded those of PCs in 2015. [5]
While iOS and Android-based smartphones and tablets continue to rule the market, Microsoft’s Windows-based Surface tablets and phones have not fared that well. According to IDC, Windows-based tablets’ market share was 2.5% in Q4 2014. Despite offering discounts on its tablets and selling smartphones at lower price points, Windows mobile sales continue to lag the overall market.
While Windows 8/8.1 was targeting tablets and PCs, Windows 10 can be used with devices less than 8 inches in size. Through this cross-compatibility, Windows will be able to sell more Windows based smartphones, and this will grow the Windows architecture user base.
Moreover, Microsoft is focusing on rectifying a major flaw in Windows 8 by introducing universal apps that will help the phone to work with other major apps like Instagram or Gmail. Microsoft’s own applications, from Xbox to Office, can further supplement app development program, which would be a meaningful step up for Windows 10 Phone store. A stronger Windows Phone OS, with better apps and developer support, could bolster the 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, thus improving user experience.
Another key development for Microsoft in 2015 is the progress that Windows 10 will make in the emerging markets because users in these markets are likely to own a smartphone before owning a PC. Therefore, when emerging market consumers buy a Windows 10 phone and then decide to purchase a PC, the familiarity with the user interface is likely to facilitate the sale. We think that this is a real differentiating factor for Microsoft, since neither Apple (NASDAQ:AAPL) or Google(NASDAQ:GOOG) have operating systems that look and feel so similar across devices.
We currently have a $44.46 price estimate for Microsoft, which is 5% below the current market price.
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- Windows 10: release date, pricing, upgrade paths, and everything else you need to know, June 2 2015, www.winbeta.org [↩]
- 10-K Fillings [↩]
- PC Shipments Beat Expectations Despite Weak Currencies and Product Transitions, According to IDC, April 9 2015, www.idc.com [↩]
- PC Shipments Will Continue to Decline in 2015 as Windows 10 Launch Approaches and Competing Devices Continue To Pressure PC Demand, According To IDC, May 28 2015, www.idc.com [↩]
- Gartner Says Sales of Tablets Will Represent Less Than 10 Percent of All Devices in 2014, October 15 2014, www.gartner.com)) Furthermore, IDC predicts that total device shipments (including handsets, tablets and PCs) will reach 1.4 billion in 2015, up 12.2% year over year, and will only continue to slow in the next few years. ((IDC: Windows Will Gobble Android and iOS Market Share; Smartphone Prices Will Drop, December 02 2014 [↩]