Microsoft’s Windows Phone Strategy Makes No Sense

Microsoft's new Windows Phone, the HTC One (M8). If it looks familiar, that's because it's the same as the Android HTC One announced in March. Source: HTC.

Last week Microsoft (NASDAQ: MSFT  )  shook up the smartphone world when it unveiled the HTC One (M8) with the handset's namesake manufacturer. In addition, the company said 17 third-party Windows Phones are in production or will be announced shortly. And while Microsoft should be commended for moving forward with its smartphones, investors should not confuse movement with progress. As is, Microsoft's Windows Phone strategy makes no sense.

Remember buying Nokia's phone business
In a push to become a "devices and services" company and diversify away from its current revenue generators -- the Windows operating system and Microsoft Office -- Microsoft paid $7.2 billion for Nokia's device business. Analysts were encouraged by the purchase because it signified Microsoft was serious about operating system and hardware integration -- something that hasn't been done well outside of Apple.

However, other moves have proved contradictory to this integration thesis. First, after announcing its Nokia bid, Microsoft decided it would no longer charge a fee to hardware makers to put Windows on devices smaller than 9 inches. While the fee before the cut was only $15 per unit, this was a large step for a company that makes the majority of its revenue from licensing fees. In addition, the aforementioned 17 third-party phones seem at odds with a company looking to monetize its own hardware.

Does Microsoft want a "walled-garden" approach like Apple?
If Microsoft wants a walled-garden approach (aka a closed platform) to compete with Apple at the high end -- a tall order -- the company should focus its efforts on the Nokia deal and ignore third-party original equipment manufacturers. In the end, quality and hardware/software integration are hard to replicate when working with numerous OEMs.

Apple has been the only smartphone company to do well with the walled-garden approach. With phones designed from the bottom up with a focus on functionality and user experience, the smartphone market has been good to Apple and its iPhone line. Over the last four quarters, Apple has sold nearly $100 billion worth of iPhones -- good for over 50% of its revenue haul.

Or does Microsoft want to continue its current licensing strategy?
On the other end of the spectrum is something akin to Microsoft's current business model. If one looks to its existing strategy in computers, the goal is to present a cohesive operating system and let OEMs design and manufacture the hardware.

This strategy has been rather successful for Microsoft and made Windows the dominant operating system in computers. However, one reason for this dominance was due to first-mover advantage and continued network effects.

Obviously, the first-mover advantage can't be replicated, but when it comes to network effects, the operating system that most benefits is Google's Android -- an OS that OEMs and developers flock to due to its nearly 80% global market share.

Microsoft's announcement of the new HTC phone was inauspicious, considering the HTC One for Microsoft is merely a repurposed version of HTCs Android phone. Does Microsoft really want to compete with Google's operating system at this juncture?

Outright competitors
In addition, this hybrid strategy presents a wrinkle in the OEM partnership. Recently, Hewlett-Packard CEO Meg Whitman drew attention when she blamed her company's lack of a turnaround in part on Microsoft::

HP's traditional highly profitable markets face significant disruption. Wintel devices are being challenged by ARM-based devices. ... We are seeing profound changes in the competitive landscape. ... Current partners like Intel and Microsoft are turning from partners to outright competitors. [Emphasis added.]

Whitman appeared to be discussing tablets --particularly Microsoft's Surface product -- and Microsoft's poor Windows 8 rollout, but the delicate relationship between OEMs and operating systems is in the very least similar. If OEMs perceive Microsoft's Nokia line of phones as a threat to their success, they could abandon the relationship.

Final thoughts
Microsoft finds itself in the midst of a turnaround. Shares of the newly invigorated company are up nearly 40% over the last year on the back of a new CEO and a continued push into the cloud. However, Microsoft needs to solve its mobile phone strategy. As is, its illogical strategy paints a picture of a company at odds with itself.

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Read/Post Comments (13) | Recommend This Article (3)

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 27, 2014, at 12:32 PM, kwright62 wrote:

    Ideally, we could buy the hardware and pick the operating system and/or switch later.

  • Report this Comment On August 27, 2014, at 1:35 PM, Fret04 wrote:

    Microsoft's strategy is easy to figure out.

    Their strategy is for the future when smartphone subsidies no longer exist. Their strategy is to have the best performance and capability to price ratio compared to high-end phones.

    For example: An iPhone 4s at ATT still costs $450 off-contract. Who is going to by that phone off-contract? No LTE (just 4G), 8 gig's of non-expandable storage, only a 3.5" screen, 512mb of RAM, etc.....

    A Nokia 635 costs $99 off-contract. Has a 4.5" screen (although not retina), has LTE, 8 gig's of storage, 512mb of RAM and much more powerful processor and GPU than the iPhone 4s.

    This phone can do everything the iPhone 4s can do at a fraction of the price. It doesn't have nearly as many apps as the iPhone does, but what do most people do with their phones? Facebook, texting, browsing the news and sports scores. Do you really need a $650 phone to do that anymore? NO. Any smartphone can allow you to do those things today.

    Basically, low-end phones can now do everything their high-end cousins can do and will be deemed "Good Enough for the price". There will be time when the size of a smartphone screen can't get any bigger before it's not longer a phone, and will no longer "Wow" people anymore. When this happens, more and more people will start to think about what they actually do with their phone instead of how it looks. When that happens, smartphone subsidies will go away and low-end phone will be the big seller. (much like how low-end PC's are "Good Enough for the Price" for most peoples needs and hence why most people tend to buy more low-end pc's than high-end pc's. The low-end options are "Good Enough".)

    When "Good Enough" finally happens to smartphones, Microsoft will have the best performing, best capable phones for the price.

    In the case of the HTC M8 Windows phone, HTC is just trying to make a buck on un-sold Android versions of that phone by putting Windows Phone 8 on it. IT'S NOT MICROSOFTS STRATEGY, it's HTCs strategy.

    How foolish.

  • Report this Comment On August 27, 2014, at 3:21 PM, c1c2c3c4c wrote:

    Flexibility is the key to any endeavor they have a high end controlled phone and OEM phones all they need it's one to work to be successful,I fail to see how you are so foolish as to thinking that they can't do both.

  • Report this Comment On August 27, 2014, at 4:16 PM, FoolCrane wrote:

    With all due respect, this is not a well thought-out article on Microsoft's Windows Phone strategy. I expect more of the Motley Fool.

    Your thesis is basically:

    MS bought Nokia, there are only two strategies they may choose, be like Apple or Google, but they can't be like Apple or Google, Meg Whitman is mad they are making laptops, and MS stock is up 40% so they have to choose some strategy I cannot imagine.

    MS bought Nokia as a practical matter - they needed to have Nokia produce some excellent Windows phones at both the high and low ends of the market while they improved the WP OS. Which they have done, and they now have in place the OS, hardware, and apps to compete fully.

    The fact that other hardware makers are creating phones on the WP platform is a good thing, yes? Does it not speak to a level of confidence in the platform? Perhaps these hardware makers know something you don't.

    As other comments have argued, WP is trying to fill a gap in the market - produce the quality of Apple at the price point of Android. Is that a bad idea? I don't think so.

    WP is a better platform than Android. You may not know this, but it just works better day to day, in your hand. No crashes, no bugs, no malware. Cortana is excellent, voice recognition is excellent, the UI is excellent, build quality of the hardware (both Nokia and others) is excellent, and apps availability is good and getting better. I have an Icon from Verizon, and my friends with iPhones and Android and jealous of my phone's capabilities - excellent screen, camera, video, low light capability, etc. etc.

    I don't work for MS, I own my own business. I have been using WP for two years, having switched over from Android because I did not like Android, and did not want Google to own all the data about my life. I have over 100 apps on my phone, and they do everything I want to do, and the do it well.

    MS is trying to do something difficult, but worthwhile. They do have a plan, and they are executing.

  • Report this Comment On August 27, 2014, at 6:09 PM, TMFJCar wrote:

    @FoolCrane,

    Thanks for reading.

    <<MS bought Nokia, there are only two strategies they may choose, be like Apple or Google, but they can't be like Apple or Google, Meg Whitman is mad they are making laptops, and MS stock is up 40% so they have to choose some strategy I cannot imagine>>

    I never said Meg Whitman's mad that Microsoft is making laptops --they aren't.

    <<The fact that other hardware makers are creating phones on the WP platform is a good thing, yes? Does it not speak to a level of confidence in the platform? Perhaps these hardware makers know something you don't. >>

    I never said that having hardware makers creating the phone was a bad thing. I specifically pointed out Google's Android OS for this. And speaking of hardware confidence, Huawei recently abandoned the Windows Phone. My point is it is hard to keep many hardware partners happy when you have a miniscule market share and they are competing with you. Here's the link: http://www.computerworld.com/article/2599025/windows-phone-o...

    <<WP is a better platform than Android. You may not know this, but it just works better day to day, in your hand. No crashes, no bugs, no malware. Cortana is excellent, voice recognition is excellent, the UI is excellent, build quality of the hardware (both Nokia and others) is excellent, and apps availability is good and getting better.>>

    I didn't comment on anything there except the apps availability (the ecosystem argument). However, Microsoft's still hasn't put a substantive dent into the smartphone market. Thanks for reading.

  • Report this Comment On August 27, 2014, at 6:25 PM, TMFJCar wrote:

    @Fret04,

    Thanks for reading. Are you recommending Microsoft commit to a strategy that may not happen?

    We don't know when and --more importantly--if smartphone subsidies will end. In addition, it appears if carriers do away with subsidies they will lower the monthly bills and provide smartphone financing--same thing, different name.Let's be honest, carriers aren't "giving" you anything --they are just raising the price to cover the subsidy.

    So I'm not sure waiting for "the end of subsidies" is a solid strategy either.

    Also, yes it is HTC's strategy to repackage unsold phones with a new operating system but it is Microsoft's to accept a six-month old repackaged phone. Since it is the same phone you are essentially competing on ecosystem here and I think Microsoft can't do that now. Perhaps later.

    Thanks for reading everybody!

  • Report this Comment On August 27, 2014, at 6:45 PM, BtilEntrails wrote:

    What a Foolish and shame to read this write-up.

    Doom and Gloom, MS what are they doing, minus the “Lions, Tigers and Bears... Oh my!”

    Real simple, at one point Netscape was the market share owner for the browser before we had the war of browsers. Today, even that battle has shifted with % of ownership shared by someone that was not even a player back in the day of Netscape and Internet Explorer battles. Who uses Chrome?

    The phone is no different today and I am sure Blackberry would like to have a do over for the last 8 years.

    This is why I find this write up to be Foolish. For me, are you in the game or did you take yourself out of the game.

    Is it a mountain or a hill that is going to need climbing?

    Technology is never ending, but specific things never change and that is the purchasing power of the user and whatever they have for a current criteria at the moment they make a purchase. The power is in the process of the consumer and the consumer is a global consumer. This is where I am seeing the WP shine, when the price can meet purchasing power in markets that are not with incomes equal to the USA and others of its type.

    Use to say, if Apple would only sell their OS and let me use on that hardware. But then again, Apple is doing their thing and it is not failing in today’s market. So back to the thought about the browser wars of old, a % today does not make what tomorrow will be. Android is on the majority, will that stay true in the future? I do not think so, but I am just one Fool with a view. Take your seats, we have a brawl that is just ramping up.

    MS, keep doing what you are doing. The fact that many vendors are now making a WP, this speaks volumes as to what is happening. And if these new vendors are just testing the waters, so be it, each of these vendors are going to battle with their own plans.

  • Report this Comment On August 27, 2014, at 7:09 PM, c1c2c3c4c wrote:

    @TMFJcar

    OEM's need market share driven up before it is profitable to make a phone on a new OS, without nokia "Competing" there is no market. as far as competition somehow being bad for OEM's it is only bad if they cant bring anything new to the table... and if they cant do that then there is no need for 3rd party phones. your argument is null. the same can be said about the surface.

    besides that they make new hardware capabilities clear to OEM's well before they tell outside developers... which is where a good portion of your leaks come from. (they do this to insure they have the information as soon as Nokias hardware division.)

  • Report this Comment On August 27, 2014, at 8:03 PM, TMFJCar wrote:

    @ c1c2c3c4c,

    Thanks for the follow up message and for not calling me a fool this time -- as an aside, I know it sounds witty for commenters to call Motley Fool authors fools but it is slightly overdone at this point. : )

    <<OEM's need market share driven up before it is profitable to make a phone on a new OS, without nokia "Competing" there is no market>>

    My response to you is Google. Why didn't Google need a huge internal hardware division to bolster its operating system? Its Motorola Mobility purchase didn't "make a market" and Google sold it to Lenovo.

    And aren't you slightly nervous about that statement "without [N]okia "competing" there is no market"? If its strategy was to create an operating system and OEMs would come, aren't you at the least bit nervous that they didn't and Microsoft had to buy a hardware maker.

    <<as far as competition somehow being bad for OEM's it is only bad if they cant bring anything new to the table... and if they cant do that then there is no need for 3rd party phones>>

    I'm not sure I agree with you here. OEMs would rather not compete with operating systems, period. That's just basic business sense, if you ran a widget shop you'd prefer to be the only widget maker -- that's Econ 101. The HP quote in the article addresses this. Do you think HP wanted Microsoft to come out with its Surface tab? I'm pretty sure my argument isn't null.

    Obviously we're not going to agree on Microsoft but I truly appreciate you reading my article and chiming in with your opinion.

    Thanks!

    Jamal Carnette--the author

  • Report this Comment On August 28, 2014, at 12:42 PM, jasongw wrote:

    @TMFJcar: Who cares if Huawei abandoned WP? You're talking about a niche player who never even bothered to distribute their products in the wider global market. I have yet to see a single Huawei Windows Phone device for sale ANYWHERE, and I do keep an eye out for new devices in the marketplace. Moreover, at the same time as this niche player dropped WP, about a dozen new partners have jumped on it. Why? Because of a few smart things Microsoft did:

    1. They dropped the fees. Windows Phone is now free for all OEM's, making it literally cheaper than Android (which requires license fees to MS because Google can't seem to develop the OS without infringing on MS's tech)

    2. They altered hardware requirements so that WP will run on any Android hardware, making the investment by OEM's essentially as slim as the cost of installing a ROM, optimizing firmware and slapping a windows logo on the back.

    3. MS's new "Universal apps" approach, which merges the API compliance between phone and PC Windows, making it super easy for developers to create a single app that works on both platforms. It's good for the developer, the consumer, and the ecosystem.

    Long story short: Huawei is irrelevant, and they created their own failure.

    As others have pointed out: Microsoft's strategy makes a LOT of sense, for the reasons listed above as well as others I won't rehash.

  • Report this Comment On August 28, 2014, at 1:04 PM, TMFJCar wrote:

    @jasongw,

    Thanks for reading and the comment. Huawei is pretty relevant on the world stage. There's a reason you don't see them --they don't really target the US market for either Android or WP.

    Going back to the relevancy comment, you do know they are the third largest handset maker, right? After Samsung and Apple it's Huawei.

    And sorry, I feel this hybrid open-closed platform approach isn't going to work. We'll all see though.

    Thanks for reading

  • Report this Comment On August 28, 2014, at 10:14 PM, chilero wrote:

    If the additional OEMs can give a significant boost to market share for Windows Phone, one could foresee that Microsoft's own share would also rise. A rising tide and all that. If it plays out then not only will MSFT generate more revenues from their own hardware but the OEMs selling more would also be potentially generating more revenue for from MSFT services.

    Huawei was a kick in gut but also somewhat strange. They are leaving at the time when the software is free and they can simply reuse their current Android hardware like HTC. The extra costs they mentioned have declined.

    A lot of people play up the Meg Whitman comment. HP, which has been so poorly managed for so long do need a scapegoat for continuing poor results. So why not Microsoft? It is so much easier to lay the blame on someone else.

  • Report this Comment On August 29, 2014, at 11:53 AM, Fret04 wrote:

    @TMFJCar

    Here's some info about the average size of smartphone screens over the years:

    2007: 2.59"

    2008: 2.67

    2009: 3"

    2010: 3.27"

    2011: 3.53"

    2012: 4.03"

    2013: 4.38"

    2014: 4.86"

    Why are people going to line up for the iPhone 6? Because 4" screens just to cut it anymore, right.

    So building on that trend, by the year 2020 people will all have 8.5" screens on their smartphones, right? Wait, wouldn't having an 8.5" screen on a smartphone be too big call it a phone anymore? How about at 10 inches?

    So, how will the cellular manufactures "WOW' us when the max size of a smartphone screen will settles in at about 5.5 or 6 inches without a bezel? Remember, the retina phenomenon is a real physical phenomenon. They can advertise that the newest screen will have 20 million pixels on it, but at 5.5 inches, your eyes won't be able to tell the difference between 4 million or 20 million, or 100 million. That is a proven fact. And since your eyes won't be able to tell the difference, pixel count will become just as insignificant as an 80 mega-pixel digital camera. Most people just won't care at that point.

    And since most Smartphone OS's have the same capabilities as their high-end counter parts, what will be the selling point for those high-end phones? For example, a $100 Windows Phone can literally do everything a $650 Windows Phone can do. It's just that the $650 Windows Phone has a much better screen and faster processor.

    And speaking of processors, do you really need that 8-Core 64 bit processor that Snapdragons just unveiled in a phone? Do you plan on running a hospital with your phone? No. Then why do you need all that processing power. As much as they advertise multitasking / split-screen, is it really effective on a 5.5" screen? Sure, it's way more powerful than you need it to be, and it'll kill your battery life just as much too.

    So WHEN all this happens, AND IT WILL HAPPEN, will people continue to shell out $650 or more for the high-phones, and lock themselves into a contract where they cannot shop for prices of data plans, or will they buy a low-end phone, that has the same quality screen and just as capable as their high-end counter-parts, off-contract, not only saving themselves money on the cost of the phone, but will also allow then to be able to shop for the lowest data plan prices and save even more money?

    Windows Phone is set up perfectly for that scenario. That OS runs super smooth on the lowest of spec'd phones. And those lowest of spec'd phones only cost $100 off-contract and can do everything their high-end counterparts can do.

    That is the future of smartphones.

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