Will Microsoft's Steal Apple's Thunder Sooner Rather Than Later?

Many investors have all along feared that Microsoft (MSFT 1.87%) would turn out to be a one-trick pony, after the company was swept aside by the mobile revolution, spearheaded by tech titans Apple (AAPL 1.68%) and Google (GOOG 1.00%). Microsoft finally snapped from its deep slumber after realizing that the revolution was not a fad but was here to stay. Still, nobody seriously believed that the company stood any chance with its Windows platform, against the vastly popular Android and iOS platforms.

But all that is now changing, after Windows has shown serious intent in becoming one of the top players, and perhaps even unseat iOS as the second-most popular operating system after Google's Android. Windows phone is now the fastest-growing smartphone platform, and the second-most popular smartphone platform in Latin America and India. The OS grew 48% year over year in the emerging countries, and enjoyed a huge 366% year-over-year increase for Nokia Lumia sales in the U.S. Investors have been quick to notice all this impressive progress, and Microsoft shares gained 47% in fiscal 2013.

Fastest-growing platform
Windows platform for both smartphones and tablets has been growing much faster than any other platform, and by a wide margin. More importantly, Windows phone sales saw a 46.7% year-over-year growth, while iOS saw a 6.7% growth, leading to loss of market share for iOS from 20.9% to 17.6%. In terms of market share alone, iOS market share fell 15.8% last year.

The story is not much different for tablets, where Windows has been growing its market share while iOS has been losing it.

Windows Phone sports a highly competitive ASP, or average selling price, which will help it compete effectively with Android for the lower-end and emerging markets. This is where the real opportunity lies, since the developed economies are close to hitting saturation point. Smartphone and tablet adoption rates in emerging economies, on the other hand, is still quite low, with plenty of room to run. Apple targets only the higher end of the mobile devices markets, and has a limited presence in emerging economies.

Microsoft's Nokia acquisition will give it a strong foothold in emerging markets, where Nokia is already a well-known and popular brand.

Microsoft has already succeeded in providing seamless integration with its Office 365, Windows 8.1, and Xbox for both developers and customers. Neither iOS nor Android can boast of such capabilities, and from the look of things, won't be able to do so anytime soon. The integration story can give Microsoft an upper hand against competing OSs, particularly iOS.

Microsoft has also been extremely aggressive in expanding its global data centers to boost its capacity to provide seamless cloud services to its customers. Office 365 has been fairly successful, and has defied its critics to reach more than 1 million users. Microsoft's enterprise business has been growing at 8% every year since 2008. Microsoft Azure is growing exponentially, and SharePoint/Yammer and Dynamics businesses are both growing in double digits.

You might wonder how all these growing businesses will help Microsoft's Windows dominate Apple's iOS. As Microsoft rolls out its integration capabilities across the enterprise to businesses via Windows 8.1 and Office 365, and to consumers via Xbox, it will pick up lots of new users that need seamless app integration across their businesses and homes. Many people don't want their information stuck in separate incompatible systems.

The perceptions surrounding Microsoft are, therefore, largely inaccurate since most of its business lines are actually doing well. The company is growing an enterprise technology under its "One Microsoft" initiative. This vision will go a long way to helping the tech giant regain its leadership position in the mobile market.

A low-cost, integrated smartphone will be a high-value proposition for many users to resist, especially in the emerging markets. Home and business users, on the other hand, will also start appreciating the real benefits of a seamless user experience across multiple screens, and will gravitate toward a Windows platform that serves them equally well whether they are at work or in play.

The IDC has forecast that Windows Phone will grow its market share from 3.9% in fiscal 2014 to 7% in fiscal 2018. In the same time span, iOS will see its smartphone market share drop marginally from 14.9% to 14.4%. So iOS will still have a bigger market smartphone market share than Windows by 2018, but the gap between it and Windows will have narrowed considerably.

Source: IDC Mobile Tracker, February 2014. Shipment volumes in millions.

Foolish bottom line
Windows platform is slated to grow its market share considerably as more and more businesses and consumers appreciate the benefits of seamless integration across multiple platforms. Windows Phones' lower ASP compared to iOS will help it compete effectively with Android in emerging markets, where most people find iPhones too pricey. Windows will not kill iOS anytime soon, but will cut itself a respectable niche in mobile devices.