Microsoft (NASDAQ:MSFT) ruled the PC world for decades, and became the largest company in the world in 1999 when it reached a mind boggling $618 billion market capitalization. However, missing the boat with the whole smartphone uprising, combined with a shrinking PC industry in recent years, helped Apple (NASDAQ:AAPL) to overtake Microsoft as the biggest tech company in 2010.
Even Bill Gates has admitted that the way Microsoft entered the cell phone business was "clearly a mistake." However, after heavily investing in its mobile operating system, buying the whole mobile phone unit of Nokia (NYSE:NOK), and spending more than $7 billion in the acquisition, the company's smartphone strategy may be starting to pay off.
In Europe, Microsoft already owns 10% of the market, just a little behind Apple. Gaining market share in emerging markets -- which is Android's territory -- is a harder task, but the company is also set to become more competitive, after finishing its Nokia acquisition. How does post-Nokia Microsoft plan to keep gaining market share in the highly competitive global smartphone market?
Unveiling Microsoft's smartphone strategy
In mature smartphone markets, such as in the U.S. or Japan, the combined market share of Microsoft and Nokia is very small. However, the picture is completely different in emerging economies. Windows phone is the third-biggest operating system in Argentina, Brazil, and Chile, and it is the second-biggest smartphone brand in Peru, Mexico, and Colombia.
It is precisely in emerging economies, where smartphones are sold contract-free, that we can see Microsoft's mobile strategy in full motion. The company is going cheap, simply because it is aware that most smartphone users in the world are price sensitive. Price consciousness is what made Android phones rule the smartphone world in the first place. This trend won't change, due to the aggressive pricing strategy of competitors like China's Xiaomi.
Notice that most companies are not attracted by the high-end segment anymore, because there is more growth potential in the low-end segment. According to eMarketer, five billion people are expected to use smartphones by 2017, with most of the growth taking place in Asia. Africa, the Middle-East, and Asia-Pacific regions are expected to add more than 500 million new smartphone users over the next four years.
Apple's weaknesses are Microsoft's gains
Microsoft acquired Nokia to access 30,000 patents, and own the Lumia smartphone brand. More important, it acquired Nokia, which was once the dominant supplier of mobile handsets, because most new smartphone users will be located in emerging economies. These are markets where Nokia has plenty of experience selling handsets, since the feature-phone era. The Finnish company has the precise low-cost structure focus, robust distribution network, and strong branding that Microsoft needs to sell smartphones in the southern hemisphere.
Apple, on the contrary, has a strong brand but a weak pricing strategy. First, unlike Android devices, there is no such thing as a specific iPhone for a specific market segment. Even Apple's cheap 5c model may not be cheap enough. Although Apple recommended a retail price of $99 for its 5c model, in practice you can only obtain the 5c at such price if you sign up to long-term contracts with mobile carriers.
However, the trend in emerging markets is to acquire contract-free smartphones, and a contract-free 5c isn't cheap. In China, the device costs more than $700, or the equivalent of two Xiaomi flagship smartphones. As a result, Apple has seen slow sales for its cheap devices.
My Foolish take
Microsoft can take advantage of Apple's weakness in emerging economies by identifying customers who have no brand loyalty, have owned no smartphone before, and use Windows in their home PCs. In other words, potential Windows Phone lovers. If Microsoft provides them with a good product at an even better price, it may see amazing sales volume in the near future. Nokia's Lumia hardware, combined with Microsoft's expertise in software building and an aggressive pricing strategy, could do the work.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple 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.