Windows Phone 7 Starts to Look Like a Contender

Microsoft (NASDAQ:MSFT) launched its new smartphone platform Windows Phone 7 last year. Since the launch, it has received little interest for its phones. In the meantime, its main competitors Google’s (NASDAQ:GOOG) Android and Apple’s (NASDAQ:AAPL) iOS have seen tremendous growth and are dominating the smartphone OS market. Android now has 50% market share of the global smartphone market and a 40% share of the U.S. market while iOS commands a 27% share in the U.S.

Ironically, Microsoft currently makes more money from Android than it does from its own Windows Phone 7 platform. (Read: Android is 3x More Valuable to Microsoft than Windows Phone 7).

We have a $28 Trefis price estimate for Microsoft, which implies around 15% upside to the current market price.

Microsoft’s Smartphone Strategy

Despite its slow start, Microsoft has been able to score a few major wins in the last year. With its patent licensing agreements, it is trying to wean manufacturers off Android. It entered into an agreement with one of the largest smartphone manufacturers in the world – Nokia. Nokia has adopted Windows Phone 7 as its primary platform and will soon launch new smartphones powered by WP7.

It expects to release the Mango update for Windows Phone 7 devices which brings more than 500 new features for users. After Mango, rumors suggest that the “Tango” release will target the budget smartphone segment. These lower price point markets are currently dominated by Android. ^[1]

And finally, it is attracting more manufacturers to its platform. Samsung, HTC and LG created the first Windows Phone 7 devices while Nokia has entered into a contract to produce Windows Phone 7 devices exclusively.

New Revenue Drivers Going Forward

Microsoft’s main revenue engines are still its Office, Windows and Server divisions that generate almost all of its profits. However, its auxiliary businesses like Xbox and Windows Phone 7 are now starting to picking up. Microsoft just posted record Q2 results with the Entertainment and Devices division (Xbox + Windows Phone 7) showing 30% revenue growth, mainly due to the rise in Xbox sales.

In the coming years, we expect the Windows division (Read: What Windows 8 Means to Microsoft’s Stock), and the Xbox and Windows Phone 7 businesses to drive a major portion of the revenue growth.

Check out our complete price analysis for Microsoft.

1. Windows Phone ‘Tango’ to be Microsoft’s lower price-point operating system?, ZDnet, August 9, 2011 [↩]