It's been almost two years since HTC released a Microsoft (NASDAQ:MSFT) Windows Phone -- the last Windows Phone that the Taiwanese OEM made was the 8X, released in late 2012. The pair is finally back together now with the new HTC One M8 for Windows.
HTC's call option on Windows Phone
For HTC, this is a no-brainer -- it is merely repurposing hardware already in production. Sure, it has to spend on the software side, but most of the heavy lifting is already done. It also helps that Microsoft has officially eliminated the licensing fee for the Windows Phone in order to better compete with Android, further sweetening the deal for HTC.
Thus HTC gets to take another stab at what has emerged as the (albeit distant) No. 3 smartphone platform while taking very little financial risk, which is perfect; even though the Google Android version of the One (M8) certainly helped HTC's earnings results last quarter, the company still isn't in a position where it can splurge.
That's why the optionality that comes with the One M8 for Windows is a smart move, because there is more upside than downside for HTC.
The first third-party Windows Phone after Nokia's
One reason why the announcement is significant is that the One M8 for Windows is the first device to be released by a third-party OEM after Microsoft closed the Nokia deal.
One of the more prominent risks associated with the Nokia deal was alienating third-party OEMs, but the elimination of the licensing fee likely helped smooth things over, incentivizing some to get back on board by reducing their financial obligations.
This device's risk/reward profile is just as favorable for Microsoft as it is for HTC. The One M8 for Windows offers Microsoft some incremental upside since it is positioned above where Windows Phone is seeing sales pick up, so it won't directly cannibalize Microsoft's first-party offerings.
Last quarter's Lumia sales were being driven by the 500 and 600 series, which start at lower price points. The One M8 for Windows will start at $100 on contract, exclusively on Verizon Wireless.
Speaking of Lumia sales...
While Microsoft cares more about broader Windows Phone adoption and generating revenue from its cloud services, it still needs to sell its own devices in order to justify the $7.2 billion it paid for Nokia's handset business. Last quarter, the company's brand new Phone Hardware segment posted a razor-thin gross margin of 3% on $2 billion in revenue.
When the deal was initially announced, Microsoft optimistically assumed that it could get the segment's operating margin up to between 5% and 10% by 2018. With a phone hardware gross margin this low (profitability was hurt last quarter when the device portfolio changed and acquisition-related amortization expenses were taken into account), Microsoft has its work cut out.
The One and only? Or more to come?
Here's what really matters, though. Windows Phone and Android have each reached a point developmentally where they can share hardware in some cases. For example, Windows Phone only runs on Qualcomm Snapdragon processors, which are already dominant throughout Android, and both operating systems have shifted to soft buttons instead of physical buttons.
At the end of the day, what smartphone vendors truly want is wider distribution and broader appeal for their hardware. That generally entails avoiding carrier exclusivity wherever possible, but can also take the form of supporting 2 different operating systems on 1 hardware platform.
If an OEM can design and develop 1 device and run either Android or Windows Phone, neither of which has licensing fees, vendors can achieve greater scale. That's a tempting value proposition for an OEM that's already making Android phones, and requires very little in the way of incremental capital commitment.
If the One M8 for Windows is just the first instance of an OEM releasing a device for both Android and Windows Phone and more vendors follow suit, then Microsoft's odds of increasing its position in the smartphone market just got a lot better. But that's a big "if."
Evan Niu, CFA owns shares of Apple and Qualcomm. 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), Microsoft, and Qualcomm. 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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