Why Microsoft Launched New Smartphones And Laptop?
Microsoft (NASDAQ:MSFT) announced launch of two new smartphones and a new laptop over the coming weeks. [1] All these devices will operate its flagship Windows 10 OS and are targeted at the premium segment of their respective markets. By these launches, Microsoft aims to not only increase its market share at the higher end of the market but also improve the ecosystem for its latest OS. In fact, its installed base of Windows OS provides it leverage to sell more of its devices to enterprise clients. This is a significant step in company’s outlook as it aims to improve user experience (across OS and hardware) with niche hardware launches. In this article, we will briefly explore Microsoft’s strategy behind these launches.
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What Microsoft Plans To Accomplish?
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Microsoft hopes that with these launches it will be able to gain traction in a segment that has been dominated by Apple. The successful launch of these devices is important for Microsoft as these segment of the PC and smartphone markets has high margin, albeit lower compared to margins for its software business. Importantly, this launch will show case Windows 10’s functionality for costlier devices and help original equipment manufacturers (OEM) to adopt Windows. It also hopes that it can provide a better user experience for its Windows 10 operating system by launching hardware that is specifically designed to showcase Windows 10 capability.
The Markets And The Products
Premium Laptop Market: The PC industry is intensely competitive, as the market is largely commoditized with limited hardware and software differentiation among the various Windows-based manufacturers. Factors such as economies of scale and the strength of distribution channels have come to determine a vendor’s success. However, Apple’s Mac, while largely exposed to trends in the broader PC market, has significantly better product differentiation given its proprietary Mac OS software and applications, sleek design and premium build-quality. Apple benefits from the fact that it plays in the high end of the PC market – typically focusing on the lucrative $1,400+ price points – rather than the commoditized low and mid-range where a bulk of the volumes come from. Microsoft has been slow to realize the potential of this segment and was focused on licensing its Operating systems to OEMs. However, it has taken note of the fact that a tightly integrated hardware that improves user experience can drive bottom-line growth. Microsoft hopes to that it can win over some of the clients through the adoption of its Surface Book laptop. While we believe that global PC sales will remain tepid as users continue to adopt tablets and smartphones as alternates to satisfy their needs, this is a hybrid machine that can function as both a tablet and a full scale laptop. The price of the product starts from $1499, and Microsoft claims that it is twice as fast as Apple’s MacBook Pro, the current leader in the premium Laptop segment. The Laptop will become available from October 26th onwards. [2]
Smartphone Markets: According to research firm Gartner, Windows Phone has only 2.5% of the worldwide smartphone market, lagging far behind Android’s 82.2% and iOS’s 14.6% market share. [3] Most of Microsoft’s smartphones target the sub $200 segment, and are mostly sold in emerging markets that are expected to witness more growth in smartphone adoption. However, these phones have very low margins (8-10%) and tend to erode profitability. Meanwhile, the premium segment, which is lead by Apple’s iPhone, has gross profit of over 40%. These premium phones account for 20% of topline and 90% profitability of the smartphone industry. Considering this, it made sense for Microsoft to ditch its efforts to manufacture and sell cheap smarphones, and instead focus on selling premium quality phones at higher price points. As a result, it launched Lumia 950 and 950XL. The two new Microsoft smartphones are priced at $549 (Lumia 950) and $649 (Lumia 950XL) and are scheduled for a launch date towards the end of this year. The phones have 5.2 and 5.7-inch displays, respectively, with powerful “octacore” and “hexacore” processors. [4] These smartphones will directly target the market segment that has been well addressed by Apple’s iPhone and Google’s latest Nexus offering. Microsoft also hopes that these smartphones will showcase functionality of its Windows 10 as an OS for the premium smartphone segment. This will give Microsoft a much needed leg up for its Windows 10 at a price point it has yet to address, a price point Apple has so well targeted with its iPhone.
How Can Microsoft Sell More Devices?
Globally, many companies have Window PCs installed across their offices. Microsoft says that 110 million devices are already running Windows 10, with over 1.25 billion visits to the Windows Store. [5] We believe that Microsoft can leverage these existing ties with its enterprise client to sell its smartphones and laptops. 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 and laptops to its enterprise clients. In the past, Microsoft was successfully able to leverage this strategy as Surface tablet was widely used in NFL games on the sideline for running plays and keeping up with the strategy.
Furthermore, Microsoft has been trying to reinforce integration within its ecosystem by offering features and products that allow its mobile devices (smartphones, tablets and laptop) to work together even more seamlessly. Microsoft is introducing universal apps that will help its mobile devices 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 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, tablets and smartphones and aid in sales of these new launches.
We currently have a $44.12 price estimate for Microsoft, which is 5% below the current market price.
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Notes:
- Live: Microsoft unveils Surface Book, new phones, October 6 2015, www.usatoday.com [↩]
- Microsoft announces Surface Book laptop with 13.5-inch display starting at $1,499, October 6 2015 [↩]
- Gartner Says Worldwide Smartphone Sales Recorded Slowest Growth Rate Since 2013, August 15 2015 [↩]
- Tech Specs from Microsoft site [↩]
- Windows 10 officially installed on over 110 million devices, with over 1.25 billion visits to the Windows Store, October 6 2015 [↩]