The Next Big OS Battle: Android vs. Windows Phone

Apple won’t participate in this fight, and that’s probably better for investors.

Aug 18, 2014 at 4:30PM

Take a closer look at IDC's latest data on the smartphone market and you'll find several interesting tidbits. For me, nothing is as interesting as the Android vs. Windows Phone battle at the low-end. Apple (NASDAQ:AAPL), as it tends to do, is staying above the fray.

How will it all play out? No one can be 100% sure, but my personal belief is that Microsoft (NASDAQ:MSFT) needs to switch its strategy or risk paying a dear price to win over customers who might otherwise gravitate to Android.

The world's most dangerous robot

Again, look at the data. No one matches up with Google (NASDAQ:GOOGL)(NASDAQ:GOOG) in this market. Android vs. Windows, iOS, BlackBerry ... they're all losing share, and in Q2, only Apple shipped more devices year-over-year:

Idc Smartphone Market Share Q

Android is dominating the global smartphone market. Source: IDC Worldwide Mobile Phone Tracker, August 14, 2014. Figures may not be exact due to rounding.

Notably, Apple took a 3% hit on iPhone selling prices in the second calendar quarter. But at $561.06, the iEmpire's average handset wasn't exactly priced like a cut-rate Android device. A May report from IDC pegged the average 2014 selling price for Android handsets at just $254, dropping to $215 by 2018. No wonder so many opt for Google's OS.

A squishy strategy for Mr. Softy

Microsoft is caught in a different position. Windows Phone is billed as the functional equivalent of iOS, with the talking assistant to prove it, yet Mr. Softy also sells a variety of lower-end phones by virtue of its acquisition of Nokia's handset business.

Declining share and lower shipments suggests the mix is confusing to buyers. CEO Satya Nadella touched on the need for developing a more consistent message in a July strategy memo to employees: "We will responsibly make the market for Windows Phone, which is our goal with the Nokia devices and services acquisition." [Emphasis added.]

How much investment amounts to responsibly making the market isn't yet clear. If IDC is right, there's plenty of work to do. The researcher's study of the market found that 61.4% of Windows Phone handsets sell for $200 or less off-contract vs. 58.7% for Android handsets: 

Look elsewhere for a catalyst

As you might expect, Microsoft isn't making much from Windows Phone right now--only $54 million on $1.985 billion in fiscal 2014 hardware sales, to be specific. That's a gross margin of just 2.7%. Add in marketing, distribution, and related operating expenses, and it's likely Mr. Softy is selling most handsets at a loss. Nadella's careful wording about Microsoft's future bets on Windows Phone make sense when you look at the financials. And yet he isn't ruling out handsets altogether. Instead, he sees them as platforms for selling productivity software.

"Going forward, all the devices will be created with an explicit purpose to light up our digital work and life experiences," Nadella said in the fourth quarter earnings call held last month.  "Good examples of this today are what we are doing with Surface Pro 3 for note-taking and PPI for meetings. You can expect to see this type of innovation in our hardware, including phones."

Is that a retreat? Whatever it amounts to practically, Nadella is apparently no longer interested in a straight-up Android vs. Windows Phone war. Given the toll it's already taken, I'd say that's welcome news for investors.

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Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple and Google (A and C class) at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool recommends Apple and Google (A and C shares). The Motley Fool owns shares of Apple, Google (A and C class), 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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