Microsoft's (MSFT 0.43%) short run as a manufacturer of phones running Google's (GOOG 0.87%) (GOOGL 0.75%) Android operating system will come to an end, CEO Satya Nadella said Thursday.
The company inherited the Android phone when it acquired Nokia earlier this year. Future versions of the Nokia X product line will still be made, but they will use the Windows operating system. Nokia X was a lower-cost phone created before the Microsoft purchase to help expand Nokia's reach in the developing world. Microsoft intends to go after those same customers. But doing so with an Android-powered phone does not fit with Nadella's vision for the company.
Nadella laid out two major areas of change in a recent email to Microsoft employees. The first was about simplifying workflow in order to become more agile and move faster. The second specifically was aimed at merging the products acquired from Nokia into Nadella's plan for the future of Microsoft.
We will realize the synergies to which we committed when we announced the acquisition last September. The first-party phone portfolio will align to Microsoft's strategic direction. To win in the higher price tiers, we will focus on breakthrough innovation that expresses and enlivens Microsoft's digital work and digital life experiences. In addition, we plan to shift select Nokia X product designs to become Lumia products running Windows. This builds on our success in the affordable smartphone space and aligns with our focus on Windows Universal Apps.
When Microsoft's goal is to create customers who are engaged in the Windows universe, it makes little sense to sell Android devices. If you assume that the developing-world customers buy their first phones based more on price than features, it makes sense to create cheap Windows phones and tablets to lure them in. Then, as markets mature, the customers will already know Windows and might trade up for more expensive phones, tablets, and maybe even PCs.
If Microsoft keeps selling cheap Android phones, it's essentially doing missionary work for its competitor.
Windows phone is growing
In dropping the Android phones, Microsoft is showing a commitment to its own Windows 8 operating system. The key driver for the company in its Windows business is offering the same experience across all platforms. That strategy has worked for Apple (AAPL 0.96%), which was able to leverage its tens of millions of iPhone customers into successfully launching the iPad. Both devices offer nearly identical interfaces. If you know how to use one, you can use the other. Apple is now even making its Mac OS more iPad-like.
Microsoft, however, has had the same interface across all device categories since Windows Phone 8 launched in October 2012.
In the past year Windows Phone has been gaining some ground, according to IDC in May.
Windows Phone continues to slowly build its global footprint, and growth is expected to outpace the market throughout the forecast period. In 2014, volumes are expected to grow 29.5% over 2013, reaching 43.3 million shipments. This momentum is expected to continue into 2015, reaching 65.9 million units, continuing on to 115.3 million in 2018. It is somewhat unclear what Microsoft has in store for its recent acquisition of Nokia, but an additional positive is the number of new OEM partners recently announced. At Microsoft's Build conference this year, the company announced a number of key features that had been visibly absent from the platform in the past. If more OEMs get behind the platform, and device portfolios continue to scale the cost spectrum, Windows Phone can continue to gain momentum.
Since that report was released, Microsoft has clearly found a strategy for its Nokia line. By adding the former Android phones and their users to an already growing customer base, it should continue growing by offering multiple low-cost phones for emerging markets.
Microsoft has a long way to go. IDC predicts 2014 will end with Android having 80.2% market share, while Apple will have 14.8%, and Microsoft will have only 3.5%. IDC does see that share growing to 6.4% by 2018.
Smartphone sales are growing
Not only is Microsoft expected to grow its share by percentage, those numbers will also mean more as the overall market gets bigger. Worldwide smart connected devices -- phones and tablets -- will grow 15.6%, year over year, in 2014, reaching close to 1.8 billion devices, according to the IDC Worldwide Quarterly Smart Connected Devices Tracker.
Much of that growth will be in smartphones. IDC expects smartphone shipments to outpace total PC shipments by more than 6 to 1 in 2018.
With nearly 2 billion people using smartphones and tablets, IDC said the challenge for companies is finding the next 2 billion users. The research firm believes much of the future growth will come from emerging countries such as China, India, and Brazil. To date, those markets have largely purchased low-cost Android phones.
IDC, as of June, still expected Android to be the leading OS in the developing world. If Microsoft hopes to gain a share of that market, it had to get out of the business of competing with itself.
Can Microsoft make it work?
It makes sense to offer one operating system across all devices, and it's logical to use low-end smartphones to bring people who may never have used a computer or computer-like device into your ecosystem. The challenge for Microsoft is going to be fighting the ubiquity of Android. Competing on price is one thing, but when one company has more than 80% market share, it becomes harder to convince customers to use a system that is not like the one their friends have.
In order to encourage people to use its devices, Microsoft must make sure it offers Windows versions of whatever Android apps are popular in a given region. The company should also leverage its Office software, even if that means giving it away for a period to entice people away from Android.
Windows Phone faces a tough but not impossible road. Dropping Android phones was the right choice for the company, even if it sacrifices some short-term device sales.
