Apple's (AAPL 0.38%) success can be largely attributed to the mobile computing revolution, brought on by advent of smartphones and tablets. What started as a twinkle in Apple's eye grew into over 75% of Apple's revenue last quarter. To date, Microsoft (MSFT 1.92%) has yet to capitalize on the mobile computing revolution in a meaningful way for investors. As a result, shares have remained stuck in a range-bound rut for nearly a decade, and are likely to continue doing so until Microsoft proves that it can deliver new growth. The hope is that Microsoft's Windows 8 product lines will unify the experience between desktop, tablet, and smartphone, ultimately driving new users to its ecosystem. The million-dollar question: Are Microsoft's efforts enough to build an Apple-like mobile empire?
A tablet-sized opportunity
According to IDC, tablets will remain a high-growth area for years to come. The firm estimated that 122.3 million tablets shipped worldwide last year. By 2016, it's expected that worldwide shipments will more than double to 282.7 million. It's believed that Microsoft held 2.9% of the tablet market in 2012, which IDC anticipates will grow to 10.3% by 2016. At that time, Microsoft will be poised to benefit from the shipment of over 29 million Windows tablets. This growth will likely come at the expense of Google (GOOG 2.01%) Android and Apple iOS. Of the three ecosystems, Microsoft is seen growing the most rapidly -- at a pace of 69.2% compounded annually -- well above the 23.3% industry average. In other words, IDC sees that Windows 8/RT will ultimately be well received over the longer term.
The future is emerging
In case you haven't heard, Android is the current victor in the smartphone war since it commands an estimated 68.3% of the market. Android won by employing a worldwide OEM-driven distribution model, in which manufacturers offer an abundance of sub-$250 unsubsidized Android smartphones. This has allowed Android to become wildly popular within emerging markets, an area where Microsoft is currently gearing up for battle. Compared to developed markets, emerging markets have a larger untapped growth potential, which could help Microsoft quickly gain share in a short period of time.
Microsoft has reportedly teamed up with Qualcomm (QCOM 0.97%) to develop a Windows Phone 8 reference design in order to attract a larger base of emerging-market OEMs. It's expected that low- and mid-range smartphones based off this design will be released in the second half of this year. The hope is that this effort will plant the seeds necessary to drive emerging-market growth for both Microsoft and Qualcomm.
Like Android, the strength of Windows Phone 8 lies within the size and support of its OEM distribution network. Should a price war erupt between Android and Windows Phone OEMs, both Microsoft and Google wouldn't bear the full burden of margin pressures. For Microsoft and Google, it's mainly about market share gains, not a device's profitability. Granted, Microsoft charges a licensing fee to OEMs for Windows Phone 8, giving Android's free license model a slight edge in an all-out price war situation.
Two segments to watch
|
Segment |
Fiscal Q2 2013 Revenue |
Change (YOY) |
Percentage of Total |
Percentage of Profit |
|---|---|---|---|---|
|
Windows division |
$5,881 |
24% |
27% |
42% |
|
Entertainment and devices division |
$3,772 |
(11%) |
18% |
8% |
Source: Microsoft quarterly earnings press release. All dollar figures in millions.
Naturally, the Windows division is responsible for sales of the Surface and Windows RT licenses. The year-over-year increase was driven largely in part by the release of Windows 8 during the quarter. Although the entertainment and devices division is mainly accountable for Microsoft's Xbox 360 business, it's also home to Windows Phone sales. If it weren't for an increase of $546 million in sales related to Windows Phone, the segment would have suffered a steeper year-over-year decline.
Combined, these two segments are the key to Microsoft's mobile computing future and perhaps the end of a lost decade. If Windows Phone can gain significant market share, it's almost a given that the entertainment segment would become a larger contributor to Microsoft's bottom line. Together, these two areas could be the ticket to a winning strategy for Microsoft investors. It appears the second act of the mobile computing revolution is about to begin.
