Microsoft Continues Its Low-End Smartphone Push

Microsoft will soon launch smartphones in Africa costing $75 to $100. Here's why targeting the small but growing market could be the right move.

Evan Niu
Evan Niu, CFA
Feb 11, 2015 at 1:45PM
Technology and Telecom

Not long ago, Microsoft (NASDAQ:MSFT) realized that if it truly wanted to become relevant in the smartphone market, it needed to go low. Apple (NASDAQ:AAPL) and Samsung had already claimed the high-end, so the software giant decided that pursuing volume was the right call. Of course, that all culminated in the purchase of Nokia's handset division, which was the predominant Windows Phone vendor anyway.

Well, Microsoft is continuing its big push in the low-end smartphone market, and it's not stopping anytime soon.

A small but growing market
According to Bloomberg, Microsoft is now turning its attention to the African smartphone market, a region where other larger smartphone players like Apple have somewhat neglected. However, some companies like Lenovo and Huawei do address the growing African market.

A Microsoft executive said that the company would soon introduce new smartphones priced from $75 to $100 to accommodate growing demand, noting how smartphone usage continues to soar within the continent. The executive also emphasized that Microsoft wants to ensure full access to cloud services, while offering affordable devices.

Why the African smartphone market matters to Microsoft
Last quarter, Microsoft shipped over 50 million smartphones, including 10.5 million Lumia models and 39.7 million non-Lumia models. The segment generated $2.3 billion in phone hardware revenue, which comes to an average selling price, or ASP, of approximately $46. While a detailed breakdown would be useful for investors to distinguish Lumia ASP and non-Lumia ASP, Microsoft doesn't disclose that information. Selling phones for $75 to $100 could lift Microsoft's overall phone hardware ASP.

Nokia has long dominated the market for cheap phones, and that hasn't changed since the acquisition closed last April. Windows Phone tends to do better in markets that are more price-sensitive, such as Spain and Italy in Europe where it has double-digit market share. That's why targeting the African market could pay off, even as smartphone and Internet penetration rates are currently quite low there. Only 20% of African consumers have Internet connectivity, a figure that Facebook is separately trying to increase for its own business.

The bigger picture
Many parts of Microsoft's fundamental business model are undergoing shifts under Satya Nadella. The company is allowing certain versions of Windows to be subsidized by advertising and other cloud services, while it continues to expand its hardware operations to unprecedented levels.

As Microsoft continues these transitions, it needs to incrementally grow its user base, especially when it comes to mobile users in emerging markets. If it can attract users to its platform with affordable hardware, it can then turn its attention toward monetization through cloud services. If that all sounds eerily familiar, that's because it's precisely what Google also does. In fact, Google was arguably the primary catalyst for Microsoft's current shift.

For now, Microsoft will continue targeting the low-end in order to bolster its user base.

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