Microsoft's (MSFT 2.44%) Windows Phone finished 2014 with only 3% of the global smartphone market, compared to 82% for Google (GOOG 2.49%) (GOOGL 2.30%) Android and 14% for Apple (AAPL 1.62%) iOS, according to research firm IDC.
Despite that massive gap, investors shouldn't give up on Windows Phone yet. IDC expects Windows Phone's market share to hit 6.4% by 2018, while Gartner believes that it can claim 10%. Getting more hardware partners to launch more Windows Phones could expedite that market growth.
But above all else, the upcoming launch of Windows 10 -- which will unite phones, tablets, and PCs under a single operating system -- could finally give consumers a reason to buy a Windows Phone instead of an Android device or an iPhone.
Source: Microsoft
How Windows 10 will change Windows Phones
Cosmetically, Windows 10 phones won't look that different from Windows Phone 8.1 devices. But internally, a lot will change.
Skype and SMS will be united in a single messaging app. A resized version of Outlook, identical to the PC app, will replace the awkward Calendar app. Outlook will use Word for all emails, which will increase the relevance of mobile Office apps.
Cortana will get an improved voice recognition engine and keep synchronizing information between a user's phone and PC. Project Spartan, an upcoming web browser which straddles mobile devices and PCs with Cortana integration, will synchronize reading lists, and feature a "reading mode" similar to the distraction-free reading modes in Apple's Safari and Mozilla Firefox. Windows 10 will also finally replace the five navigation apps from Nokia's (NOK 3.62%) HERE with a single Maps app which can be controlled via Cortana.
Simply put, Windows 10 for smartphones retains the UI that users are familiar with, consolidates redundant features, and emphasizes a tighter synchronization with PCs and tablet apps.
The importance of universal apps
By emphasizing the use of "universal apps," which run across all Windows 10 devices, Microsoft accomplishes two things. First, it encourages developers, who would otherwise avoid Windows Phone due to its small market share, to create apps which also work on Windows PCs, tablets, and Xbox Ones.
That's a massive market for a single app, and as the Windows Store grows, so will Windows Phone's app ecosystem. Second, universal apps eliminate the confusing divide between ARM and x86 devices which prompted Microsoft to launch Windows RT. Granted, ARM devices will remain incompatible with older x86-based Windows software, but that distinction will fade as developers update their apps to be "universal" ones.
Microsoft currently controls over 90% of the PC market with Windows, but that market is highly fragmented. According to Net Market Share, 56% of PCs still use Windows 7, 18% run Windows XP, 13.5% use either Windows 8 or 8.1, and 3% still use Vista. To consolidate up to 70% of that market, Microsoft will offer Windows 10 as a free upgrade for a year to Windows 7 and 8 users. The upgrade will also be free for most Windows Phones. The appeal of running the same OS across PCs, tablets, and smartphones could greatly increase demand for Windows Phones.
More hardware and carrier partners
Microsoft's Lumia phones currently account for 95.6% of the entire Windows Phone market, according to AdDuplex. HTC, Samsung (NASDAQOTH: SSNLF), Huawei, and lesser-known manufacturers comprise the remaining sliver of the market.
For Windows Phone to grow again, it needs more hardware support. As the Android market becomes overcrowded with cheap devices, premium players like Samsung and HTC will need to support other operating systems to avoid being stuck in a race to the bottom. HTC previously released a Windows Phone variant of its flagship Android phone, the HTC One M8 for Windows. Samsung is reportedly mulling the launch of new Windows Phones in 2015, but that probably won't happen until it settles its Android royalty lawsuit against Microsoft.
HTC's One M8 for Windows. Source: HTC
Other struggling Android players could soon realize that the strengths of Windows 10 phones -- free licenses, a unified app ecosystem with PCs, and an uncrowded market -- greatly outweigh its weakness in market share.
More hardware allies can help Microsoft negotiate better terms with carriers. In the U.S., exclusive flagship deals with AT&T and Verizon didn't boost its market share, but better selling phones -- like the Lumia 520/521 and Lumia 635 (which account for 31% of the Windows Phone market) -- were sold at multiple carriers.
Don't count Windows Phone out yet
Windows Phone trails iOS and Android by a wide margin, but investors shouldn't give up on the underdog OS yet.
Windows 10 will streamline smartphone functions and tether mobile devices to PCs. Universal apps could offset Windows Phone's perceived weakness in apps. An overcrowded Android market could force top tier manufacturers to start supporting Windows Phone instead. If those three things happen, IDC and Gartner's optimistic predictions for the growth of Windows Phone could be realized ahead of schedule.
