Microsoft's Smartphone Ambitions Are Too Lofty

Earlier this week, AdDuplex released estimates on how Microsoft  (NASDAQ: MSFT  ) Windows Phone is faring. Specifically, the figures estimate the different models that comprise Windows Phone. Nokia  (NYSE: NOK  ) is unsurprisingly the dominant vendor for Microsoft's platform, but what's notable is the rising popularity of low-end models such as the Lumia 520 and Lumia 620.

Source: AdDuplex (August 2013).

After closing the Nokia deal, Microsoft is hoping to generate more than $40 in gross profit per smartphone, up from less than $10 currently. However, Nokia's overall handset business sells phones at an average selling price of just $60 with an adjusted gross margin of 24%, which translates into just $14 per unit. That's after paying out Microsoft's Windows Phone license fee, but it goes to show how difficult it may be for Microsoft to reach its target of $40 in gross profit per unit. The company will be relying heavily on cost-saving synergies to do the trick.

In contrast, Apple  (NASDAQ: AAPL  ) remains content to stay in the high end of the market with its new iPhone 5c. The Mac maker didn't alter its pricing strategy, which isn't surprising since that same pricing strategy is what allows Apple to grab the overwhelming majority of operating profits within the smartphone industry. While some Apple investors have expressed disappointment with the company's unit market share recently, they should remain quite pleased with its profit share.

Investors may have shrugged off headlines earlier this month that Ford  (NYSE: F  )  CEO Alan Mulally was in the running to become the next CEO of Microsoft  (NASDAQ: MSFT  )  following Steve Ballmer's retirement. However, this storyline has now gained steam and AllThingsD is reporting that Mulally is now one of the top candidates. That could be bad news for Nokia's Stephen Elop, who will be returning to Microsoft and has been widely considered another top candidate.

Mulally has been widely credited with Ford's remarkable turnaround, which included getting rid of unnecessary brands, streamlining operations, paying down debt, and unifying the company's internal culture. Microsoft has long been criticized for its internal culture and structure, which promote internal competition instead of collaboration. That bureaucracy has been named as one of Microsoft's biggest weaknesses, which is also where Mulally could do wonders.

In today's episode of Tech Teardown, Erin Kennedy discusses Microsoft's latest news with Evan Niu, CFA, and Jamal Carnette.

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  • Report this Comment On September 28, 2013, at 11:13 PM, techy46 wrote:

    Who cares I love my Lumia 900 and will be getting a Lumia 920 or better plus a Windows 8.1 all-in-1 for Christmas 2013.

  • Report this Comment On September 29, 2013, at 2:14 AM, casualsuede wrote:

    Really? Is the author for real?

    Sigh, there is some ignorance going on here. Nokia makes many different kinds of phones, from $30 feature phones all the way up to $500+ Lumia devices.

    If 80% of Nokia devices are made up of these feature phones, then of course the average selling price is $60. But MS doesn't make royalties from those devices (they do make the few bucks in profit, as owners). They do make much more on each SMARTPHONE that Nokia manufactures.

    Let's keep an apples to apples comparison here folks. Sad when the peanut gallery has to correct you.

  • Report this Comment On September 29, 2013, at 3:00 AM, zippero wrote:

    Windows desktops and Windows phones are both dead. Apple's 64-bit A7 chip and 64-bit iOS7 enable desktop-level computing in people's hands, eliminating the need for a desktop computer once and for all. It's the fulfillment of Steve Jobs' truly mobile, "post-PC" era. As iPhones and iPads get better and take over more desktop functions and applications with more advanced, speedier apps and functions, desktop PC sales and usage plunge further until basically the desktop PC industry goes extinct like the dinosaurs. Microsoft gets killed for obvious reasons, but Google gets killed too, because Google still gets over 90% of its ad revenues from searches done on desktop PCs. No one clicks on tiny Google ads on smartphone screens. Sorry, Google.

  • Report this Comment On September 29, 2013, at 5:09 AM, butthead2u wrote:

    Low end smartphones are also used to get people to transfer from feature phones to smartphones. A significant portion of them will then migrate up to higher cost phones and prices of higher end phones will also get cheaper. Take for example that my kid is not getting a top end smartphone now but when he pays for his own he will!

    I was, and still am to a certain extent, that Microsoft did away with the Zune. They have nothing to get kids hooked into the ecosystem that don't have a phone. Apple has nano and shuffle and we have nothing. Obviously it was done to give phone makers the best chance to extend their profits but makes it harder to get those future customers.

  • Report this Comment On September 30, 2013, at 7:16 AM, Bull683 wrote:

    First, your chart is outdated. The actual article from adduplex uses September 20 data.

    Second, you say Nokia pays Microsoft's licensing fees, yet tell us Microsoft made a deal with Nokia for their handset unit. In fact, now Microsoft pays Nokia for patent licensing. In addition, with Nokia out of the business any reference to their adjusted gross margin is suspect.

    Third, with a story headlined as such, you offered two serious paragraphs on Nokia and Microsoft, albeit with lacking references and outdated material, and then hoisted the Apple flag pretty much the rest of the way. What does the reader take from this other than the feeling we just read a National Enquirer article.

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