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Should Microsoft Corporation Throw in the Smartphone Towel?

The good news for smartphone OS providers is that consumers can't seem to get enough. For the first time ever, according to research firm Gartner, shipments of smartphones surpassed a whopping 300 million units in Q2. Not surprisingly, Google's (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) Android OS continues to dominate global smartphone market share.

There were a couple of surprises in store for second place Apple (NASDAQ: AAPL  ) , as well as Microsoft's (NASDAQ: MSFT  ) Windows Phone OS -- and they weren't good. Even as shipments of smartphones running iOS increased compared to the same period in 2013, Apple continues to lose overall market share. But even more surprising is how poorly Windows Phone performed in 2014's second quarter. Microsoft's smartphone OS isn't just having difficulty gaining traction, its taking two steps backward for every step forward. So, how long will Microsoft CEO Satya Nadella continue down what is clearly a losing path?

How long can this continue?

It's been about four years since Microsoft first introduced its Windows Phone to the world. A lot has changed since then, to say the least. Way back in 2010 Nokia's Symbian OS ruled the smartphone OS roost, followed by Android, and what is now BlackBerry, with iOS a close fourth. By the end of 2010, believe it or not, Microsoft had already captured a then-impressive 4.2% of the OS market.

Fast-forward to 2014's Q2 and the market share of Windows Phone has fallen to 2.5%, down from last year's 3.4%. Microsoft's year-over-year smartphone OS declines don't bode well for Nadella's "mobile-first, cloud-first" mantra. Actually, Nadella's emphasis on mobile and cloud is at least half-way working. Microsoft is a leader in cloud solutions, and its results in the burgeoning market are encouraging. With an annual run rate of over $4.4 billion, Microsoft is arguably king of the cloud. But that still leaves a gaping hole in Nadella's two-pronged plan.

A few specs

Smartphone vendors shipped a record 301.3 million smartphones in 2014's second quarter, up over 25% compared to the same period a year ago. The two dominant smartphone OS players, Google and Apple, accounted for over 96% of the global smartphone OS marketplace, up from a "mere" 92.6% in Q2 of 2013. That sounds good if you're an iFan, right? But the jump in total market share of the big two was due to Android, which now accounts for 84.7% of all smartphone operating systems worldwide.

Apple, while retaining its place as the clear number two OS, saw its piece of the smartphone pie decline compared to 2013's Q2, from 13% to 11.7%. At first glance, Apple's decline in smartphone share might lead you to believe that Microsoft's mobile push was the beneficiary of its rival's rough Q2. Unfortunately for Nadella and team, that's not even close to true.

Where to go from here

After completing its $7.2 billion deal with Nokia earlier this year, throwing in the mobile towel isn't an option for Microsoft -- yet. Sure, Google unloaded its own devices unit recently, but that was after years of fruitless attempts to turn its Motorola Mobility unit into a money-maker. It's too early for Nadella to consider taking the same path as Google and off-loading it devices and services unit, so what are his options? Coincidentally enough, though, following another of Google's moves could help.

Nearly 60% of Android OS shipments in Q2 were smartphones that cost less than $200, off contract. And that trend is expected to continue, according to Gartner, as manufacturers focus on emerging markets. That's an opportunity for Microsoft's mobile efforts, as it already sports a decent low-end lineup thanks to Nokia, and is continuing to roll out new, low-cost smartphone alternatives. And despite rumors to the contrary, Microsoft has wisely said it has no plans to exit the low-end smartphone market.

As it stands, Microsoft has formed precious few partnerships with other device manufacturers, meaning the vast majority of Phone OS users own Microsoft smartphones. Getting Windows Phone into the hands of users, regardless of who built the device, will help Microsoft gain adoption of its OS. And as users look to replace their units, they'd be more apt to consider a Microsoft-built device.

Final Foolish thoughts

No one expected Microsoft to dive into smartphones and immediately command a large part of the OS market; too many players were already too entrenched. But after four years, even the most die-hard of Microsoft smartphone OS aficionados are left scratching their heads. Call it quits? Nadella's hands are figuratively tied, for now. Inking more smartphone manufacturing partnerships and employing a laser-like focus on emerging markets could help turn the tide. Something needs to be done, because throwing in the towel simply isn't an option.

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Read/Post Comments (3) | Recommend This Article (1)

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 August 20, 2014, at 8:44 AM, melegross wrote:

    Some of this is a bit optimistic. Nokia, as has been said, does have low cost Win Phone phones. But they aren't doing well. Their high end phones aren't doing well. Sales are down by a good bit. Yes, there were no new products recently, but still, new products haven't taken off either, when they come out. A top Nokia model went from $199 on contract to free within just a couple of months. This is typical.

    Buying the phone division of Nokia may have seemed to be a good move, but it just locks them into something that they might have to get out of. I think the board was correct in opposing this. They should have fired Ballmer then, instead of giving in. Look what happened, he was forced out anyway.

  • Report this Comment On August 20, 2014, at 9:57 AM, MrGreeves wrote:

    What Microsoft really needs to get rid of is their marketing team. With their latest update to Windows phone 8.1, their phone OS has gotten better that Apple's mobile OS. They are now in some ways ahead of Android and some ways still behind. Microsoft just needs to show people that, which is where they have really been failing across all there product lines.

  • Report this Comment On September 03, 2014, at 12:51 PM, NYTony wrote:

    One of the real problems with windows phones? Verizon and AT&T Reps that know absolutely nothing about them.

    My wife and I love our Windows Phone, and decided with to get our child one for their 14th birthday. When I went in to Verizon to see what was there, I told the guy I wanted to see Windows Phones. I got the shocked look and a "Oh Really?" from him. He proceeded to show me where the phones were, but still tried to talk me into an iPhone ("All the kids seem to want one") or an android . . this one has the latest . . . .

    So yes, verizon customer service rep . . . I want a Windows phone.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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