3 Ways Microsoft Can Save Windows Phone

Microsoft's (NASDAQ: MSFT  ) Windows Phone could fade away sooner than expected, according to research firm IDC's second-quarter report on worldwide smartphone shipments.

Although Windows Phone posted year-over-year growth every quarter last year, shipments fell 9.4% in the second quarter as its market share fell from 3.4% to 2.5%. Microsoft's decline in smartphones wasn't surprising, since the company lacks reliable hardware support outside of Nokia's handset division, which it acquired for $7.2 billion in April.

Nokia's Lumia 930. Source: Microsoft.

Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) Android and Apple (NASDAQ: AAPL  ) iOS respectively claimed 84.7% and 11.7% of the market. Faced with those odds, some analysts have suggested that Microsoft cut its losses and abandon Windows Phone.

However, that would shatter the "One Windows" idea championed by CEO Satya Nadella, who aims to have mobile devices, PCs, and gaming consoles tethered to the same cloud-based ecosystem. Therefore, let's look at three realistic ways that Microsoft can help the Windows Phone hold its ground against Google and Apple.

Replacing RT with Windows Phone 8
One of Android's biggest strengths is that its tablets and smartphones use the same operating system.

That cross-compatibility paved the way for companies to make creative hybrid devices, such as Asus' Transformer tablet/laptops and PadFone tablet/smartphones. It also encouraged developers to launch more apps on Google Play, since one app could be used across both device types. Apple adopted a similar strategy for iPhones and iPads.

Asus's Transformer (L) and PadFone Infinity (R).

By comparison, Microsoft has Windows 8 on x86 computers, Windows RT on tablets, and Windows Phone on smartphones. Windows RT, which is designed for ARM processors, is unpopular because it only runs apps downloaded from the app store, instead of software for older versions of Windows. By last September, the only hardware company making RT devices was Microsoft, which stubbornly kept the OS alive with the Surface RT, Surface 2, and Lumia 2520.

Since no one else wants to make RT tablets anymore, Microsoft should replace RT with a scaled-up version of the Windows Phone OS to unite the smartphone and tablet ecosystems. This could convince companies such as HTC and Samsung  (NASDAQOTH: SSNLF  ) , which have made Windows Phones in the past, to launch new Windows Phone tablets or phablets.

Selling cheaper low-end devices
Former Nokia CEO Stephen Elop, who now heads Microsoft's devices group, believes selling low-end Windows Phones in emerging markets can help it gain global market share. That's why Microsoft recently discontinued the Nokia X Android, Asha, and S40 devices, which were cannibalizing sales of Windows Phones.

Yet that strategy hasn't stopped Microsoft's low-end market share from peaking. According to IDC, 61.4% of Windows Phone's global market share comes from sub-$200 devices, compared to 58.7% for Android. Microsoft's most popular device has been the Lumia 520, which originally cost $170 and claimed 30% of the Windows Phone market in 2013.

Looking ahead, Microsoft will shed market share because its devices aren't cheap enough. In India, Celkon's Campus A35K, a low-end Android 4.4 smartphone, only costs $50. Google is getting ready to flood emerging markets with sub-$100 "Android One" handsets. Mozilla's Firefox OS phones from Intex and Spice will cost as little as $25.

The Lumia 530. Source: Microsoft.

The upcoming Lumia 530 will be the cheapest Windows Phone at about $100 -- but it still won't be cheap enough to compete against those low-end products. If Indian companies are launching phones for $50 at razor-thin margins, Microsoft should lower its prices even further, sacrificing margins to gain market share.

Stronger hardware alliances
Nokia sold 92% of all Windows Phones last year. Other players, including Samsung and HTC, only dabbled briefly with Windows Phones while heavily promoting their Android handsets.

Despite its dependence on Android, Samsung isn't completely loyal to Google. The South Korean electronics company -- which accounts for 25.2% of handsets sold worldwide -- has been testing out Tizen, its proprietary OS, as a possible way to declare independence from Google.

Samsung recently delayed the Samsung Z, its first Tizen smartphone, reportedly due to a lack of apps. That failure represents the perfect opportunity for Microsoft to forge a stronger alliance with Samsung to develop Galaxy-branded, not ATIV-branded, Windows Phone devices.

HTC's One M8 Windows Phone.

HTC, which only has a global market share of roughly 2%, has been struggling to escape Samsung's massive shadow. HTC's latest Windows Phone handset, the HTC One M8 for Windows, is equipped with identical hardware to the Android HTC One M8. If HTC can easily swap out the OS without switching the hardware, other Android manufacturers could consider launching Windows Phone variants as well.

There's certainly an incentive to do so -- Android manufacturers pay Microsoft patent royalties (which Digital Trends estimates at $1 per handset) for every smartphone sold, but they don't pay Microsoft anything to install Windows Phone.

The Foolish final word
Microsoft can't afford to kill the Windows Phone, despite its slumping market share. If it does so, the company will lose its link to mobile users and be forced to rely on Android and iOS apps to expand its ecosystem -- something that Google and Apple will work hard to undermine.

If Microsoft finally replaces RT with Windows Phone, sacrifices margins to gain market share, and secures alliances with high-end hardware makers like Samsung and HTC, Microsoft's mobile phones might still have a fighting chance.

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