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

Microsoft's Windows Phone continues to lose ground to Google's Android.

Sep 2, 2014 at 4:47PM

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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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), 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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