Microsoft Using Nokia to Go After Cheap Cell Phone Market

Microsoft has been gaining market share with its Windows 8 phones but its acquisition of Nokia should allow the company to add customers in developing countries.

Apr 29, 2014 at 10:49AM

To become a player in the global smartphone business Microsoft (NASDAQ:MSFT) is setting its sights on customers outside of the United States and even outside of the developed world.

While most of the hype about smartphones centers on the top-of-line phones, the real growth in the market won't come from people buying high-end handsets. Instead the next explosion of new smartphone users will come from developing countries where affordability matters more than being the latest and greatest.

Microsoft, which just completed its purchase of Nokia -- which was once the top handset maker but has fallen mightily -- will target customers in developing markets to revive the brand it paid over $7 billion to acquire and grow audience for its Windows 8 Phone platform.

How big is the market?

"The overall mobile phone market is growing faster than previously forecast thanks to a stronger-than-expected first half of the year driven by strong gains in emerging markets and the sub-$200 smartphone segment," according to IDC. 

IDC forecast that 2013 smartphone shipments would top one billion. The growth of sub-$200 smartphones is part of the reason the research company predicts that total smartphone shipments will reach 1.7 billion units in 2017.

"Two years ago, the worldwide smartphone market flirted with shipping half a billion units for the first time – to double that in just two years highlights the ubiquity that smartphones have achieved," said Ramon Llamas, research manager with IDC's Mobile Phone team. "The smartphone has gone from being a cutting-edge communications tool to becoming an essential component in the everyday lives of billions of consumers."

While smartphones will represent nearly the entire market in developed countries they will be increasingly important in the developing world.

"Smartphone shipment volume will be dominated by emerging markets, such as China, even though the percentage of smartphones to feature phones won't be as high," said Kevin Restivo, senior research analyst with IDC's Worldwide Mobile Phone Tracker program.

These are users who don't have smartphones and for whom smartphones will be their primary (and only) computing device. Microsoft offers a potential advantage to these users as the company bundles versions of its Office software with its Windows 8 phones making even its low-end devices more attractive. 

How big is Microsoft's share of it?

Smartphone Market Share

Microsoft only has a tiny share of the overall smartphone market but its piece of the pie has been growing.

In the fourth quarter of 2013 Windows Phone established itself as the clear number three and was the fastest-growing platform among the leading operating systems with a 91% year-over-year gain, according to IDC.  

Microsoft clearly acknowledged the opportunities offered in the developing world in its press release announcing that the Nokia deal had closed.

"[W]ith the Nokia mobile phone business, Microsoft will target the affordable mobile devices market, a $50 billion annual opportunity, delivering the first mobile experience to the next billion people while introducing Microsoft services to new customers around the world," the company wrote. 

Microsoft will continue to compete with Apple (NASDAQ: AAPL) and the various phone-makers using Google's (NASDAQ:GOOG) Android in the high-end market, but the company clearly sees that its opportunity to become a player in smartphones comes from its ability to sell itself to people who don't yet have them. 

This is about more than phones for Microsoft

For many years Microsoft made PCs that ran on Windows, which pretty much required customers to buy its Office software. That was a sweet deal -- basically a monopoly -- that was hardly threatened by niche players like Apple, which never commanded a big share of the PC market. The rise of smartphones and tablets shattered that monopoly and pulled some users out of the PC world or stopped them from entering it in the first place. 

In developing countries a sub-$200 (or even cheaper) smartphone will be the first connected device for many. These aren't computer users adding on phones and tablets these are customers having their first computing experience on a phone. Some of those people will stay phone-only but some will add tablets, notebooks, or desktops. Microsoft -- since it dropped licensing fees for Windows 8 on devices below $250 -- is positioning itself to offer customers a variety of options at all price points -- much like what has developed in the Android world.

In theory Microsoft can win new customers in developing countries around the world, expose them to the Windows operating system, then keep them in the Microsoft ecosystem as their computing needs increase. 

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Daniel Kline is long Microsoft. He is thinking of switching to a Windows Phone. The Motley Fool owns shares of Apple, Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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