Microsoft (NASDAQ: MSFT ) has been struggling to win smartphone market share with its Windows Phone mobile operating system. In the first quarter, while the number of Windows Phones shipped rose by 8.7% year over year, the operating system's global market share sank by half of one percentage point to just 2.7%.
Microsoft's acquisition of Nokia's mobile phone operation gives the company the ability to pump out hardware, regardless of OEM support for Windows Phone. Microsoft's recent decision to make Windows free for all devices under 9" eliminates any price advantage that Google's (NASDAQ: GOOG ) (NASDAQ: GOOGL ) Android devices might have. But, Microsoft is going further, continuing Nokia's dabbling in Android by releasing a new Android-based phone, the Nokia X2. Why is Microsoft selling Android phones? Because it has to.
Not your typical Android phone
While the Windows Phone has made big strides recently, increasing the number of apps available and introducing well-reviewed new features in the Windows Phone 8.1 update, Android's global market share is at near-monopoly status. Microsoft has already determined that it's not going to make money on Windows Phone licenses, so its plan is get people using its myriad of cloud services. Whether that's on Windows Phones or on Android devices, the more Microsoft users the better.
The Nokia X2 runs a fork of Android, replacing typical Google apps with Microsoft alternatives. For example, instead of Google Drive, Microsoft OneDrive is the default cloud storage app; instead of Gmail, Outlook comes standard; instead of the Google Play store, there's Nokia's app store; instead of Google Search, there's Bing. Even the standard user interface is replaced with something that looks an awful lot like a Windows Phone, with faux live tiles to boot.
There are two types of smartphone buyers: those purchasing their first smartphone and those replacing an existing smartphone. It's clear that Microsoft is targeting the former category with the Nokia X2. The price is 99 Euros off-contract, and will likely be free on-contract, so it's one of the cheapest smart phones available. While the smartphone market in developed countries is fairly saturated, the developing world has yet to jump en masse aboard the smartphone revolution. Inexpensive devices like the Nokia X2 and the Moto E will be the types of devices that these first-time smartphone buyers typically choose.
Getting users in the door
Microsoft has been making a big push toward offering its software and services on every device under the sun, a shift from predominantly focusing on Windows. The recently released iPad Office apps, which were well-reviewed and optimized for the device, came before Microsoft bothered to create a touch-centric version of its productivity suite for Windows 8, something that it still hasn't done. OneDrive is available on iOS and Android, and it even features built-in automatic uploading of photos and videos taken on Android devices. In short, Microsoft isn't kidding when it says that it's now a mobile and cloud-first company.
The point behind the Nokia X2 is to get people using Microsoft's software and services. Keeping Microsoft software strictly on Windows Phone isn't going to work, given the low market share, so the only way for Microsoft to actually make money in the mobile market is to support other platforms. The hope is that first-time smartphone buyers will buy a Nokia X2, use Microsoft's services instead of Google's, and then have a real reason to choose a Windows Phone next time around. Whether this plan will work remains to be seen, but it's likely a necessary step for Microsoft.
The bottom line
Microsoft isn't selling an Android phone because it wants to -- it's selling an Android phone because it needs to. Windows Phone 8.1 is a perfectly competent mobile OS, but it was late to the party, and Google is the bouncer. Sneaking in by forking Android and pushing its own services is really Microsoft's only option at this point, and the next best thing to selling a Windows Phone is getting someone to use its software. The Nokia X2 may or may not accomplish that goal, but Microsoft's strategy makes sense.
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