Is Microsoft's Windows Phone Bound to Be a Flop?

Microsoft (NASDAQ: MSFT  ) had high hopes for Windows Phone when it acquired Nokia's handset business last year. At the time, Microsoft believed it could take as much as 15% of the global smartphone market by 2018  -- that now seems highly unlikely.

Rather than increase its mobile market share, Microsoft has only lost ground in the last year, as Google's (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) Android continues to take a progressively larger share of the market.

Microsoft is losing ground
According to research firm IDC, Microsoft's share of the global smartphone operating systems market has declined. In the second quarter of 2014, Windows-powered smartphones represented just 2.5% of the market, down from 3.4% in the same period last year. Google's Android, meanwhile, has only expanded, with its share of the market growing to 84.7% last quarter from 79.6% a year ago.

This is quite a setback, as Microsoft's management said last year it would spend the next 12 months aggressively courting emerging market buyers in an effort to grow its share of the market.

To be fair, Microsoft has definitely succeeded in interesting some low-end buyers: As a percentage of total Windows Phone sales, the vast majority are at the low end. According to IDC, more than 61% of the Windows Phones sold last quarter retailed for $200 or less. On a percentage basis, this was actually more than Android, as just 58.66% of Android-powered handsets were in that price bracket.

Huawei doubts Microsoft's chances
Yet total unit shipments didn't even come close -- 255.3 million Android-powered handsets were shipped last quarter, compared to 7.4 million Windows Phones.

Microsoft has attempted to expand Windows Phone in other ways, notably by making it more attractive to third-party handset manufacturers. In recent months, reports have indicated that Microsoft has held talks with certain handset manufacturers, and has even made the mobile operating system free.

Despite these adjustments, smartphone makers remain skeptical. China's Huawei, which has become one of the top five largest smartphone vendors in the world, recently downplayed Microsoft's chances.

In an interview with The Wall Street Journal, Huawei's head of consumer business group, Richard Yu, said it has been difficult for the company to "persuade customers to buy a Windows phone." As a consequence, Huawei has put its Windows phone projects on hold. Yu admitted that he is not a fan of his company's reliance on Google's operating system, but admitted bluntly that Huawei has "no choice."

The issue for Huawei's Windows phones may be one of ecosystem; Yu claimed that it was "easy to design a new [mobile operating system]," but building an ecosystem around it was immensely difficult.

With more than 1.3 million apps in the Google Play app store, and just over 1 billion Android devices in use, Google's ecosystem has traction. Microsoft's Windows phone, in contrast, still suffers from a general lack of apps and little third-party support.

Microsoft may have misread the situation
Ultimately, Microsoft may have simply misread the market when it purchased Nokia's handset business last year. In its presentation, Microsoft referred to all Android phones as "Android/Galaxy phones" suggesting the company didn't take Google's other hardware partners seriously. This fits in line with the thinking of Nokia's former CEO, Stephen Elop, who admitted to picking Windows phone over Android because of a risk that "one hardware manufacturer could come to dominate."

Samsung's Galaxies still compose the bulk of Android-powered handsets, but the market has become much more complex over the last year, particularly at the low end. Motorola's inexpensive Moto G sold 1 million units in India during its first five months on sale, while Xiaomi has risen to the top of China's smartphone market. Lenovo, LG, and the aforementioned Huawei use Google's mobile operating system and collectively account for 16.7% of the smartphone market -- up from 14.1% last year.

"For Windows Phone, it's difficult to be successful," Yu noted.

The odds certainly seem to be against it.

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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 September 02, 2014, at 5:16 PM, FoolCrane wrote:

    I've seen nothing but negative articles by MF about Windows Phone.

    OK, you have made your point.

    It is also not obvious that you're correct. Are you pushing an agenda to try to improve your return on other stocks? Why the negative focus?

    WP may be successful, and it does not have to get 50% of the market to be successful. I see the tide turning - more articles praising the platform, the hardware availability, the apps. And new apps are coming out all the time. IF you were right, why are there 13 new handsets coming out or in design at this moment? OK, Huawei is out, so what? MS can make it's own hardware.

    The impact of version 8.1 and first class hardware at all price points has not played out yet, and only from now to over the next 6 months will we see the effect.

    I think your articles are biased. I don't work for Microsoft, I am own my own biz and have used WP for 2 years. I like it, it's secure, not buggy, and does everything I want it to do with an interface/UI that I like better than the competition.

  • Report this Comment On September 02, 2014, at 5:49 PM, CT0306 wrote:

    It proves that nadella is useless than garbage.

  • Report this Comment On September 02, 2014, at 7:09 PM, kellenbmiller wrote:

    According to everyone that uses a Android, yes.

    They should just give it to the manufacturers. Attach themselves to it like Google did with Android.

    They should build the Nokia's for Windows OS and Android and what ever other OS's are out their.

    If they want to compete. Compete.

  • Report this Comment On September 02, 2014, at 8:09 PM, rblands wrote:

    I'm also a Windows Phone user. Ditto what FoolCrane wrote.

  • Report this Comment On September 02, 2014, at 8:46 PM, toraji wrote:

    Foolcrane,

    You are SO right, it's really hard to find positive articles on this site about Microsoft.. Maybe they have most of their eggs in Apple's basket?

    I am a windows phone user for over two years to and with all the updates it received during this time it really is a GREAT OS for a phone. Most of Al secure, secondly it does everything I want (have the 1020 and the 1520) and PIC's are FANTASTIC.

    Microsoft predicted 15% market share by 2018, I believe it but more importantly is that 15% would show HUGE profits

    Everybody is writing their funny noses of because Microsoft lost market share this quarter but this was to be expected. All that had to be done to finalize the Nokia deal and not being able to get new phones to the market soon enough.. people want new phones but are waiting... In this waiting time Microsoft might have lost momentum but I am sure they will make up the coming months.

    Anyway. LOVE my phones.. never a iOS, frond or BB device for me again

    Regards

    t

  • Report this Comment On September 02, 2014, at 8:49 PM, toraji wrote:

    *froid stupid auto correct!

  • Report this Comment On September 02, 2014, at 9:18 PM, granitesthacker wrote:

    Microsoft does not have a problem convincing customers. They have a problem convincing sellers. Walk into any AT&T, Verizon, T-Mobile, Sprint, or Best Buy venue (even online) and sales folks steer customers away from Windows Phone. Of course customers go with the recommendation... The sales person makes it clear that if you stray from the recommendation, you won't get the best deal. Want to try a Windows Phone? Check out the Microsoft Store.

  • Report this Comment On September 02, 2014, at 9:41 PM, FiendishFig wrote:

    @CT0306

    Clearly he's useless as the stock price has gone from low thirties to mid forties since his takeover and their cloud business is exploding, which he excels in...

  • Report this Comment On September 02, 2014, at 11:57 PM, Paralos wrote:

    I just switched from iphone to htc one m8 windows phone. I did this out of boredom with ios, and to try something new. I personally love this windows phone os and couldn't care less about the "bound to flop" articles. The point about there being a problem with convincing sellers is spot on. My verizon sales person knew essentially nothing about this phone.

  • Report this Comment On September 03, 2014, at 10:21 AM, sdclams wrote:

    Destined to flop? Maybe. But the Nokia Lumia 1020 is the best phone I have ever had. The only downside at all to WP is that there are not 1.5 million mostly useless apps.

  • Report this Comment On September 03, 2014, at 4:03 PM, chilero wrote:

    Huawei left but they gained over a dozen new OEMs with 17 new phones already confirmed.

    With over 300,000 apps it is getting harder for the anti-Microsoft crew to continue to claim an app gap.

    So many of those Apple and Android apps are counted twice with a free version and a premium version.

  • Report this Comment On September 06, 2014, at 8:27 PM, jaymichael88 wrote:

    Honestly, I like my windows phone, and the only thing I don't like is the google/windows fight. I'm trying to sync my google plus and download google chrome to use also, and I can't do it, due to the fact that I can't download official Google apps in the Microsoft store. Some websites can't use the windows internet explorer and its really making it hard for me to check things. I wish that they would integrate themselves without. Changing the windows phone system.

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