Why Windows Phone Will Be Number 2

There are three major smartphone operating systems left standing. Apple (NASDAQ: AAPL  ) has iOS, Google (NASDAQ: GOOGL  ) has Android, and Microsoft (NASDAQ: MSFT  ) has Windows Phone. Currently, Android is number one worldwide with a whopping 79% market share. iOS is number two with 13.2%, although it's much stronger in the United States. And Windows Phone is a distant number three with just a 3.7% share.

But what will the market look like a few years from now?

Why Google's Android will remain number one
Android is completely free for OEMs to use in their devices, making extremely low-cost phones possible. Much of the volume growth in smartphones going forward will be in the low-end, as emerging market customers increasingly begin to use mobile devices. With the cost of traditional PCs putting them out of reach for many, an inexpensive Android device could act as the first computing device for hundreds of millions, possibly billions, of people.

Google doesn't make any money directly from Android, but more people using the OS and the company's various web services will lead to higher advertising revenue. Advertising is Google's bread and butter, and locking in as many people as possible to the Google ecosystem ensures that the core advertising business continues to grow.

It's hard to imagine any OS overtaking Android at this point, especially given the popularity of the platform. It's hard to compete with free, and with all sorts of devices running Android, like tablets and game consoles, it's clear that the OS is here to stay.

Why Apple's iOS will fall to number three
The only smartphone that runs iOS is the iPhone. Unlike Google, Apple doesn't allow anyone else to use its OS, keeping with its PC strategy. This helps Apple protect its brand by preventing cheap, low quality devices from hitting the market. While there are plenty of high-end Android devices, there are even more cheap pieces of junk.

Apple has always focused on marketing itself as a premium brand. This allows Apple to charge high prices, and maintain high margins, at the expense of market share. An example of this is the PC market. Apple has just a 7% market share in terms of unit volume while accounting for a staggering 45% of the profits. Larger manufacturers, like Dell and HP, sell far more units but make very little money doing it.

The smartphone market will likely follow a similar path for Apple. Because the company refuses to sell low-end devices, Apple is destined to see its market share slip further and further. Profits will remain high, but iOS will make up a decreasing portion of the overall smart phone pie.

The alternative would be for Apple to introduce a cheap version of the iPhone in an effort to pick up sales in emerging markets. The problem with this strategy is that it tarnishes the brand, with the worse case scenario being that Apple loses its appeal and, more importantly, its ability to charge high prices. Imagine if a cheap MacBook was released in order to compete with low-end Windows laptops. It would very quickly destroy years of work building up the cult following which surrounds Apple's products.

A cheap iPhone would have the same effect, and is thus not a very good idea for the company. Apple did release the iPhone 5c, which is less expensive than the iPhone 5s, but the 5c is essentially just the previous version wrapped in a plastic casing. It's not a true cheap iPhone, and I doubt that there will ever be one.

Why Microsoft's Windows Phone will become number two
Windows Phone has had a tough time gaining market share in the U.S., where the iPhone and Android are essentially neck to neck. But performance in some international markets has been fairly strong. Windows Phone has a nearly 10% market share in Italy, 8% in the U.K., 8% in France, and 6% in Australia. Windows Phone is even stronger in Latin America, where it has already surpassed iOS to become the number two mobile operating system.

Microsoft's proposed acquisition of Nokia, which accounts for a large part of the Windows Phone market, frees the company from total reliance on OEMs to use its OS. Microsoft can thus ensure that quality Windows Phones are being made, and putting hardware and software under one roof should create efficiencies which didn't exist while Nokia was a separate company.

One advantage that Microsoft may have is that OEMs like Samsung aren't too happy about being completely dependent on Google. Samsung is actively developing an alternative OS, Tizen, which could start finding its way onto smartphones. An alternative to attempting to launch a no-name OS, though, would be for Samsung to begin putting Windows Phone on some devices. The resistance to Google gaining too much of a stranglehold on the market could help Microsoft gain more market share.

Another thing that Microsoft has going for it is its dominance of the enterprise PC market. It stands to reason that, since most companies and organizations run Windows on their PCs, Windows Phone is a natural fit. Windows Phone was recently granted FIPS 140-2 accreditation, which essentially means that the OS is secure enough for government use. As BlackBerry fades away, Windows Phone could very well take its place among both government and private sector employees.

The bottom line
Google's Android will likely remain the dominant mobile OS for the foreseeable future, but the number two spot looks like it will belong to Microsoft. Apple will see its market share shrink, although its lush profits will probably remain, as Windows Phone eventually overtakes it to become the number two mobile OS in the world. This seems like the most likely scenario, and while putting a time frame on it is difficult, I think that five years from now Windows Phone will have proven itself to be a successful and profitable endeavor for Microsoft.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 17, 2013, at 6:34 PM, k1moops wrote:

    I strongly believe in technologies that create opportunities. It has been hundreds of years after the Industrial Revolution, machines are reaching a stage where the digital foundation has now been firmly entrenched, growths of machines are now a function of instruction sets and size of memory. Current smart device machine instruction set is 32-bit, and the memory size is 4 gigabytes, limiting the power and capabilities of machines in all aspects. iPhone 5S is the only smartphone that uses a 64-bit machine set, the iPhone 5S is thus capable of using much more than just 4 gigabytes of memory, iPhone 5S can use 192 gigabytes of memory, the same idea as a 64-bit Windows 7 versus a 32-bit Windows 7 memory limit. Theoretically, the 64-bit iPhone 5S can use 2 terabytes of core memory, not the gimpy 4 gigabytes of core memory that is the limit for every other smartphone or tablet. Apple's iPhone 5S is truly equivalent to every 64-bit computers that are running for all kinds of users and organizations. Apple is not a company that makes underpowered machines targeted for the underprivileged and the incapable masquerading as 'cost-effective' but in all truth are incompetent and uncompetitive. Though many Apple users are rich and affluent upper class, but the underlying truth in using Apple machines is the burning desire to excel and compete in a chaotic and cutthroat competitive world.

  • Report this Comment On October 17, 2013, at 6:44 PM, k1moops wrote:

    As to your reference to PC makers that rely on Microsoft, my simplistic explanation for their near total failure is due their incapable of making and selling 128 or even 256 bit machine instruction set machines. You say that Apple is insistent on making big profits, the Apple I knew started as an envelop pushing innovator. Jobs was a genuine computer hobbyist into making cool powerful machines until Microsoft and IBM screwed him by making the inferior IBM PC.

  • Report this Comment On October 17, 2013, at 7:03 PM, zippero wrote:

    Does the author smoke crack? According to ITG, 59% of Windows phone users don't want to buy another Windows phone: "Among current Windows Phone users surveyed, 59% plan to switch to other mobile phone platforms, ITG reported" -- http://news.investors.com/technology-click/101613-675470-app...

    As for Android, it already has to pay big royalties to Microsoft for every handset, so it's not "free." And Apple's multi-touch patent ("Steve Jobs patent") was just upheld by the US Patent office, which means Android is basically out of business in the U.S. as Apple will never license this critical patent to Android no matter how high the royalties: http://www.theverge.com/2013/10/17/4849376/apple-multitouch-...

  • Report this Comment On October 17, 2013, at 8:12 PM, DanManners wrote:

    Great Article. But maybe DOS will make a comeback and become number 2? Or DRDOS? Or CPM80?

    Question? Are you back on the pipe?

    Anything is possible. You got an article on Motley Fool. You learned to use a napkin.

    For windows to beat out Apple is possible if Apple went out of business. When is that going to happen? If 10 years or more? Sure in tech things change bigtime but MSFT is not going to win over anyone with that junk o/s. They sell Windows only because they have a monopoly on the desktop. They did well with Xbox. But that is it. Is Xume going to replace the iPod? Didn't you write that article? If Appel dies, the only O/S will be Android. No one can beat Google and Samsung. Only Apple.

  • Report this Comment On October 17, 2013, at 8:46 PM, k1moops wrote:

    I predict Apple setting up shop in USA making ultra high density memory chips (> 5 terabyte capacity) using nano technology. Apple's Siri and Touch ID technologies require very large system integration (VLSI) components like memory chips larger than today's mass market offerings. Apple's very highly advanced platform and ecosystem are extremely cohesive and tightly integrating, Apple offers the only highly mature, robust and stable platform capable of supporting extremely high tech advances applicable to today's highly complex and performance demanding world. The stake is very high with the goal of growing far beyond a trillion dollar enterprise with long term strategic growths. Apple has successfully built the iOS Fusion platform maximizing all the software and hardware components. Apple has reached the limits current hardware and software can offer. Silicon Valley is the only place with mind-boggling hardware and software technologies that have yet to be deployed by Apple.

  • Report this Comment On October 17, 2013, at 9:31 PM, vincentwansink wrote:

    This article is exactly right. Windows phone will surpass iPhone regardless of how much the iFans underestimate Microsoft. Not only is windows phone the best windows operating system (despite its immaturity) but Microsoft is perfectly positioned to grow their customer base because of its strength in desktop, server and office tools.

    Windows phone does have some growing up to do as many obvious enhancements are still missing, but the overall architecture of the OS is such that even without those features the overall user experience is superior to both iOS and Android (especially Android).

    Windows phone OS will soon support 10" screens which means tablets with this OS will soon flood the market, instantly increasing the user base for the OS and thereby developer interest. Combine that with the merging of the mobile and desktop operating system APIs and suddenly developers can build apps both the desktop and mobile OS with the same code base, further increasing developer support for windows phone.

    Before you know it, because of windows dominance on PCs, everybody on the planet will be familiar with the OS and no longer afraid of that "strange microsoft phone" and increased market share will naturally follow. Not to mention all the corporate interest in a phone that integrates seamlessly with company wide email and server technology. It's a no-brainer.

    Oh, and did I mention that Microsoft's answer to Siri (codename Cortana) is promising to be much smarter and much more advanced than Siri? Ya, I know that's hard for iFans to believe but Microsoft does spend 2.5 X as much on R&D as Apple does so don't underestimate the old giant.

  • Report this Comment On October 17, 2013, at 10:39 PM, vernr75 wrote:

    I agree with the author on everything except the statements about enterprise. I think Apple has already swallowed up the Blackberry user base in the US, essentially giving it the US enterprise crown.

    Windows phone has a great chance of becoming the number 2 platform in most countries. The reason folks may find this hard to wrap their heads around is that most people in the West don't actually know much about the wider world...and just how small the Western population actually is relative to what we call the 'developing markets'. The world now has more than 7 billion people in it. Of this, over 5 billion live in developing markets and that number is getting larger with each year. There are also more than 5 billion mobile users (compared to less than 2 billion PC users) and just over a billion smartphone user worldwide. Apple's current market share and user base were gained mostly because of the availability of huge carrier subsidies in the US market that allowed the customers to pay the same level of upfront prices for expensive iPhones that folks in developing markets pay for unsubsidized Android and Windows phones. Without those hefty subsidies and those $0 iPhone giveaways in the US, we wouldn't be talking about the iPhone right now because most of the folks who own iPhone today wouldn't be using one at all.

    Unfortunately for Apple, because these big subsidies are only available to a small percentage of the global population, their full prices essentially block over 6 billion people from ever purchasing an iPhone. This means that this isn't really a competition between iOS and Android for global dominance. That has always been an media-generated illusion. iOS is not a real global competitor to Android at all; it just had the appearance of being one for the moment because the smartphone market is still very young and we're only now emerging out of the era when all smartphones were devices exclusively for the rich.

    So, here's the picture as it stands now. We've got Android and Windows phone (and possibly Firefox Mobile, Ubuntu Mobile and Tizen) aimed at the entire global mobile market of several billion users, and we have iOS aimed only at the solitary billion who can afford those prices, with hundreds of millions of those only being able to do so because of subsidy availability. But Apple doesn't even have that billion to itself. It has to fight with Samsung, HTC, Sony, LG and others for the high end space. Without a doubt, Apple makes lots of money using its high price strategy. They've got heaps in the vaults of offshore banks. But in doing so, the iOS platform is rapidly losing global relevance to app developers emerging outside the US market as Android and now Windows phone replace the feature phone market. That's a huge deal.

    Here's why. iOS has stayed on top in app development up to this point primarily because US developers have been the ones supplying most of the apps for both Android and iOS to smartphone users who were, up until recently, mostly living in Western countries. Because the US uses iOS so heavily, developers historically picked iOS first. That's situation is not going to be the case in the future when Android and Windows phone become household items to the billions outside the US market. When scores of businesses and app developers within these foreign countries begin to create apps specifically for their local customers and clients, they're going to focus on precise what the majority are using within their own countries. Without significant market share within all of these populous territories outside the US and with Windows Phone sitting in the number 2 position, the vast majority of those locally generated apps will never arrive on iOS at all. Over time this situation will give the few remaining iOS users in developing markets a reason to abandon the platform for one of the larger ones that is locally supported. From that point onward, Apple's device sales and market share outside the US market will drop even further. And if the day ever comes when the large US carriers are forced to abandon or significantly lessen these subsidies in order to become profitable, Apple's US iPhone ecosystem will be in HUGE danger of simply disappearing.

  • Report this Comment On October 18, 2013, at 11:56 AM, JimWilcox1701 wrote:

    You missed one bit in your research... Samsung was one of the first to start making Windows Phone devices. Their ATIV S is widely considered the Windows Phone 8 version of the Galaxy III. It's available in the US from Sprint, though, IMHO they don't support it well... even at their corporate locations, I've only seen mockup displays of the ATIV S.

  • Report this Comment On October 21, 2013, at 9:14 PM, CharlesClarke3rd wrote:

    Windows Phone 7 annihilated Blackberry. Windows Phone 8 will eventually destroy Apple. Windows Phone 8.1 will eliminate Android and Google's marketing budget. Bing will soon be the dominate Search engine. January 2015, Bing will have 50% market share. January 2016, Phone will have an equal market share of Android. Mark my words. Its a done deal. It take 2 years of dominant technology to reflect in dominant market share. Invest in Microsoft, if you aren't an idiot.

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