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Why Microsoft Corporation's Windows Phone Strategy Will Pay Off

By Tim Brugger – Oct 22, 2014 at 5:00PM

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The software king is moving full steam ahead with its mobile ambitions, and new data suggests it's heading in the right direction.

It's been over a year since Microsoft (MSFT 1.99%) dove into the deep end of the mobile pool after announcing it was acquiring Nokia's device and services unit for over $7 billion. For investors and industry pundits alike, the discussions surrounding the suitability of the Nokia deal have run the gamut. Either buying its way into mobile was a much-needed step to quickly try and rectify Microsoft's lack of a mobile presence, or it was far-flung notion, much too expensive, and would prove fruitless.

Whichever side of the fence you're on, the fact is, Microsoft is moving full steam ahead in pursuing CEO Satya Nadella's "mobile-first, cloud-first" strategy. While Nadella's mobile plans are as much to do with spreading Microsoft's mobile operating system, be it via smartphones, tablets, or pseudo-tablets like its Surface Pro 3, as they do with devices, the Nokia acquisition provides the opportunity to accomplish both. And some new data confirms that Microsoft's much-maligned smartphone line-up could get a boost in the coming years.

Smartphone market growth
As Apple (AAPL 0.79%) aficionados are quick to point out, and its recent earnings report confirms, there's a large and, perhaps even more importantly, highly profitable, market for high-end smartphones. Though CEO Tim Cook didn't break out specifics in terms of how many of its 39.2 million iPhones sold last quarter were of the iPhone 6 and iPhone 6 Plus variety, he did say, "Demand has been staggering."

For Microsoft, as a relative newcomer, Apple and Google-inspired (GOOG 1.56%) (GOOGL 1.61%) high-end smartphone dominance is going to be a tough nut to crack. It certainly has quality devices to offer, including Microsoft's Lumia 1520, but incenting smartphone consumers to switch operating systems isn't easy. So, what is Microsoft to do? Continue clawing away at high-cost smartphone market share? Of course, but Microsoft's real opportunity lies overseas.

According to research from both Gartner and IDC, smartphone sales growth in emerging markets will continue to explode, even as more mature markets, including the U.S., see sluggish growth. And the differences are staggering. Gartner suggests that sales of "basic" smartphones will jump over 50% this year, and even lower-end units will double.

By comparison, IDC's research suggests that "mature markets" will grow a mere 4.9% in 2014, while the combined emerging markets will enjoy a 32.4% jump. Further, by 2018, according to IDC, nearly 80% of the smartphones on the planet will be owned by folks in emerging markets.

What it means for Microsoft
Gartner's and IDC's data confirms what industry pundits have suggested for some time: Providers with a suite of low-end smartphones will reap the rewards in the coming years, and that's an opportunity Microsoft can exploit. Prior to selling its phone unit to Microsoft, Nokia had already made a name for itself in emerging markets.

Ironically, low-cost smartphones with their razor-thin margins were partly responsible for Nokia's money-losing mobile efforts. However, Microsoft, like its nemesis Google with its wildly popular Android OS, can benefit beyond the sale of a smartphone in and of itself. For example, the more mobile devices running the Windows and Windows Phone operating systems that are in the hands of consumers, wherever in the world they may be, will translate to more Bing search traffic, just as it does for Google search. That, in turn, will generate additional ad revenues. And as more entry-level smartphones find their way into consumer's hands, even higher advertising spend will follow.

As alluded to earlier, getting users to switch operating systems when it comes time to upgrade is a challenge. Microsoft's introductory line-up of smartphones, like its recently released Lumia 830, and even less expensive Lumia 730 and Lumia 735, may prove to be a gateway to more expensive, and higher-margin, units when users in emerging markets are financially able to upgrade.

Final Foolish thoughts
Microsoft fans don't have to look far to find naysayers, particularly when it comes to implementing its mobile strategy. But the opportunity is there, all over the globe. India is a great example of just how valuable having low-cost smartphones available to the emerging market masses is. A survey was conducted asking Indian smartphone owners their favorite brand: the answer? Apple. Problem is, consumers in India can't afford an iPhone, so most end up buying a low-cost Android OS unit.

And that's where Microsoft enters the picture. Trying to beat Apple in the high-end, domestic market will be a long-term challenge. Taking on Android with a full suite of low-cost smartphones in India, Africa, and the Middle East regions, among others? That's doable, and it's Microsoft's path to becoming a global force in smartphones.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple, Gartner, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Microsoft. 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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