Microsoft's (MSFT 0.25%) Windows Phones are being slowly but surely squeezed out of the saturated global smartphone market dominated by Google (GOOG +0.48%) (GOOGL +0.56%) and Apple (AAPL 0.01%). Microsoft's market share slid from 3.6% in the third quarter of 2013 to 2.9% in the same period this year, according to IDC.
Still, Microsoft reported that Lumia phone sales climbed 5.7% year over year to 9.3 million units last quarter. That disparity was likely caused by the growth of the overall market outpacing shipments, but make no mistake -- Windows Phone remains a distant underdog in the smartphone race.
Since Microsoft remains committed to pumping out Lumia handsets, and they will be crucial pieces of its "One Windows" strategy for Windows 10, let's consider four key ways Microsoft can boost Windows Phone sales.
1. Win back hardware partners
Microsoft needs more hardware manufacturers to develop Windows Phones, since its own Lumia devices account for roughly 90% of all Windows Phones worldwide. The only notable non-Lumia Windows Phones have been HTC's (NASDAQOTH: HTCCY) One M8 for Windows and Samsung's ATIV SE.
HTC's One M8 for Windows. Source: HTC.
HTC's approach was unique because the company installed Windows Phone on an existing Android device, the One M8. That was presumably a compromise from an earlier plan to launch the One M8 as a dual-boot device for Android and Windows Phone. This means other Android manufacturers could also introduce Windows Phone variants without manufacturing brand new phones. This idea wasn't popular in the past, but it might gain traction with besieged Android handset makers dealing with a flood of cheaper Chinese handsets.
It also makes sense because Windows Phone licenses are now free. Google's Android license is free, but manufacturers ironically pay a royalty fee to Microsoft (estimated to be about $1 per device) due to older patents. If Microsoft can convince other hardware manufacturers to launch more Windows Phones, it won't have to do all the heavy lifting on its own with Lumia handsets.
2. Separate low-end Lumias from high-end Lumias
Under Nokia, the Lumia brand had an identity crisis. Its top-tier devices offered impressive specs that could go toe-to-toe with Apple and Samsung's high-end handsets.
But at the same time, Nokia kept launching feature phones, cheap "hybrid" smartphones such as the Asha, and low-end Lumia devices that were merely comparable to low-end Android devices. After Microsoft acquired Nokia's handset unit, it discontinued the Asha, but doubled down on low-end devices in emerging markets. This strategy raises brand awareness for the cheaper, lower-margin Lumias, but cheapens the premium devices. This distinction matters in newly affluent markets such as China, where demand runs high for status symbol phones like the iPhone 6.
The high-end Lumia 920 and 925 only respectively accounted for 5.4% and 3.5% of the Windows Phone market last month, according to research firm AdDuplex. The low-end Lumia 520 accounted for 26.3% of the market. This tells us that Lumia should either go all-in on the low-end market, or possibly rebrand its higher-end models as "Lumia Pros" to clearly distinguish them from the cheaper handsets.
The low-end Lumia 530. Source: Microsoft.
3. Secure the apps that matter
Last year, Microsoft reportedly paid companies $100,000 or more to develop apps for Windows Phone. It also offered guaranteed payments of $100 per accepted app for a limited time.
That strategy helped the Windows Phone Store beef up to over 300,000 apps as of August, but the platform is still missing some top applications. For example, the highest-grossing game on both iOS and Android in the U.S., Supercell's Clash of Clans, is still missing from Windows Phones, two years after its release.
Microsoft knows that an app store full of old hand-me-down apps won't convince iOS and Android users to switch to Windows Phones. That's why it bought Mojang -- the maker of Minecraft -- Pocket Edition, one of the top paid apps for iOS and Android in the U.S, for $2.5 billion in September. That was a necessary (albeit pricey) move, but Microsoft still needs to pin down many more apps for Windows Phone.
4. Make peace with Google
Last but not least, making peace with Google would win over many users. Google made life miserable for Windows Phone users by blocking Microsoft's access to major Google services including Maps, YouTube, and Drive. Third-party solutions exist, but they're often clumsy and littered with ads and prompts to upgrade to ad-free versions. This is a major turnoff for iOS and Android users, who get free first-party apps from Google.
To be fair, Microsoft offers first-party alternatives like HERE Maps, Office 365, and One Drive, but signing a deal with Google to secure basic Google apps could go a long way toward gaining new Windows Phone users.
Why should investors care about Windows Phone?
Windows Phone sales are becoming a significant contributor to Microsoft's top line. Last quarter, the division accounted for 11% of company revenue. In addition to being a component of the "One Windows" ecosystem, low-end Lumias can help Microsoft push back against cheap Android One devices in emerging markets. Therefore, investors should hope Microsoft considers implementing some of these ideas to boost Windows Phone sales in the future.
