When it comes to devices, Microsoft (NASDAQ:MSFT) is starting to become a tale of two companies. On one hand, the company's line of Surface tablets and 2-in-1s have started to attract attention, even outselling Apple's (NASDAQ:AAPL) iPad in online tablet sales in October, according to 1010 Data Ecom Insights. Slowly, but surely, Microsoft is growing its tablet market share amid savvy marketing and solid positioning.
On the other hand, however, is the company's fledgling smartphone business. After former CEO Steve Ballmer spent $8 billion buying Nokia's smartphone operations, including the flagship Lumia line, it was assumed the company would more effectively compete against the operating system duopoly of Apple's iOS and Alphabet's (NASDAQ: GOOG) (NASDAQ:GOOGL) Android. Instead, new CEO Satya Nadella took an impairment charge of $7.6 billion in June, essentially admitting Ballmer's rosy estimates would not materialize in the immediate future.
More recently, Microsoft's Chief Marketing Officer Chris Capossela has admitted its phones are lacking versus competitors. Talking to Windows-focused writer Paul Thurrott, alongside Mary Jo Foley and Leo Laporte (h/t Engadget) on Windows Weekly, the CMO described the new Lumia 950 as "solid," but admitted the company needs to do more before it can induce potential users to switch from Apple to Microsoft. Unfortunately for Microsoft, this will be harder in smartphones than tablets.
Ecosystem matters more for smartphones
While Microsoft should be encouraged by its slowly shifting tablet fortunes, the company should also be wary of thinking it portends success for its smartphone line. Although the two devices share many overlapping functions, Microsoft's tablet success appears to be predicated on playing up the more-traditional computing functions with its tablet line -- even going as far as creating the tagline "The Tablet That Can Replace Your Laptop" for its Surface Pro line of tablets.
While that positioning appears to be working well for Microsoft's tablets, this tagline is a much less effective position for smartphones, as the actual ecosystem -- the integration of network and cloud infrastructure, internal apps and content-based transaction stores, and third-party applications -- becomes an inherently more important factor in the buying decision.
Unfortunately, when it comes to the aforementioned competitors, Microsoft's ecosystem is sorely lacking as it relates to third-party buy-in. For example, Capossela was pressed about Microsoft not having Snapchat in its Windows Phone Store. The lack of this app makes it hard to convince tech-focused Millennials -- often first adopters -- the OS is a serious competition. And although Instagram is the eighth-largest app by monthly unique users, with 55.4 million users after growing that figure a commendable 23% last year, the app is still in beta status on Windows Phone.
What's your plan in smartphones Microsoft?
In the end, I'm not quite sure what Microsoft's current plan is for its smartphone line. One assumes the company initially thought it would be able to profit from both the device sale and subsequent ecosystem transactions, like Apple does. But in the absence of this success, is the company's path forward to emphasize profitable high-end device sales like Samsung? If so, perhaps it should follow BlackBerry's lead of partnering with Android as its smartphone OS. Or was the Nokia purchase essentially an $8 billion Rube Goldberg transaction to profit from more Microsoft 365 subscriptions?
Unlike the company's Surface line of tablets with a clear, aspirational value proposition, "The Tablet That Can Replace Your Laptop," the company's smartphone line's value seems unclear amid a struggling ecosystem. Before convincing would-be consumers of its value proposition, maybe it should convince itself -- and third-party app developers, as well -- first.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamal Carnette owns shares of Apple and BlackBerry. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Apple. 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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