Is Microsoft's Mobile Strategy at All Feasible?

Microsoft's mobile strategy needs to be reworked in the right direction

Jul 30, 2014 at 12:00PM

Microsoft's (NASDAQ:MSFT) mixed performance during the recent fourth quarter was largely affected by its acquisition of Nokia's (NYSE:NOK) mobile business. On the plus side, the division contributed around $2 billion to its quarterly revenue that increased by 17% on a year-over-year basis to remain ahead of Street estimates. However, the business also resulted in an operating loss worth $692 million for the company, pulling down net profits by 7.1% on a year-over-year basis to $0.55 per share. That remained way behind analyst expectations of $0.60 per share. 

However, Microsoft seems to have already anticipated these losses, as management recently announced its decision to eliminate a massive 18,000 jobs, 12,500 of which fell under the Nokia division. The company followed it up with further plans to curb operating costs for the current fiscal year.  

Despite these measures, the core problem for Microsoft remains unchanged as sales of Windows-based mobile devices continue to lag heavily behind those of rivals such as Apple (NASDAQ:AAPL) and Samsung Electronics in the global market. And that, in turn, puts a big question mark on the company's chances of success in a mobile-centric world.

The good things first
Microsoft's mobile strategy certainly seems to have its own share of bright spots. The company recently decided to stop further production of its low-end Nokia X line of smartphones powered by Google's Android operating system. This was indeed a smart move, as these phones did little other than popularize Android at the expense of its own Windows operating system.

But then, with emerging markets becoming the new hotspots for smartphone sales these days, Microsoft prudently decided to replace these phones with low-cost Lumia handsets instead. That helped the company integrate them with the overall Windows ecosystem, apart from continuing with its strategy of reaching out to consumers in such markets. The recent launch of the affordable Lumia 530 has already set the ball rolling in this direction. 

And the sad part
However, one cannot deny the fact that Nokia X phones have ultimately been nothing but part of a botched attempt by Microsoft to gain more share of the low-end consumer segment in emerging markets. And the situation has been further complicated by the presence of a slew of cheaper Android-powered handsets in such regions.

On the other hand, industry rival Apple has managed to record a 48% rise in sales for its iconic iPhones in China, the biggest emerging market of them all, during its recent third quarter. This has enabled the company to attract an entirely new high-end consumer segment in that region despite stiff competition from Samsung and other local phone manufacturers.

The other side of the story
On the bright side, Microsoft recorded a significant improvement in other business categories that include Office 365, the online version of its Office software and Azure cloud services. The company is also reaping the benefits of the recent global business PC refresh cycle that led to a 10.5% year-over-year increase in sales for its regular Office and Windows operating software during the quarter. 

Foolish final thoughts
At $7.2 billion, Nokia's phone making unit has turned out to be an expensive acquisition for Microsoft, and investors are likely to keep a keen eye on the execution of its future mobile-related plans. At the same time, the healthy improvement in the company's other businesses should give it more breathing space as it realigns its strategies on this front. With research firm IDC predicting the share of Windows phones to increase to 6.4% in 2018 from 3.5% in the current year, Microsoft's smartphone venture may ultimately turn out to be a successful one after all.

While this company does seem to have long-term potential in the mobile arena, it's still too early to reach any conclusions; one can only sit back and watch the developments from the sidelines.

Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), 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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