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Microsoft Is Banking on This Windows 10 Feature for Emerging Markets

By Adam Levy - Jan 26, 2016 at 8:09AM

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Microsoft wants to help people turn their smartphones into PCs.

A Windows 10 Phone hooked up to a display dock using Continuum. Source: Microsoft.

While unveiling a slate of new hardware devices in October, Microsoft (MSFT 2.43%) announced a fascinating new feature for the Lumia 950 and Lumia 950XL, its Windows 10 phones. Users can hook them up to a keyboard and monitor, and use the devices just like a PC, using a feature called Continuum.

In an interview with The Verge following the event, CEO Satya Nadella said Continuum is aimed at emerging markets -- which is to say, mobile-only markets. Indeed, providing PC capabilities without the need to buy a PC could have a dramatic impact on emerging markets and Windows' presence in them. That could be its differentiating factor against Android, the mobile OS from Alphabet (GOOG 2.68%) (GOOGL 2.63%) subsidiary Google.

But there's one catch: The hardware requirements for Continuum were extremely high end, which makes it prohibitively expensive for most of the consumers it's targeting.

That's all changing
Earlier this month, Microsoft laid out new hardware requirements for Windows 10 Phone owners who want to use Continuum. It now requires a less-powerful processor than before, opening the door for more mid-range phones to access the feature. In the near future, consumers in emerging markets such as India, China, and Brazil will have access to a full-fledged PC just by plugging their phone into a dock.

Nadella hopes this move will spur sales growth of Windows Phones in emerging markets. Currently, Windows accounts for just 2.4% of smartphone sales in China, according to Kantar Worldpanel. Android, meanwhile, took 74.2% of the market in the three months ended in October 2015.

Windows Phone isn't doing any better in the rest of the world, either. Gartner's third-quarter market share number pins the OS at just 1.7% of the market. Android took 84.7% of the market.

As the world moves toward using mobile devices first, Microsoft is looking to leverage its strengths in software and computing to compete in the market. The legacy of Windows from the 1990s and 2000s has left a huge ecosystem of apps and software for Microsoft's OS. Windows 10, and Continuum in particular, is able to take advantage of that ecosystem because it operates on every device type -- from the smartphone to Microsoft's augmented reality headset, the HoloLens.

Still a big opportunity in emerging markets
While China is already the largest smartphone market in the world, there's still a lot of growth left for smartphones in emerging markets. That means despite its paltry market share, Microsoft still has time to make up ground.

Ericsson estimates that by 2021, 6.4 billion smartphones will be in use around the world. It estimates there are currently only 3.4 billion smartphones in use as of the end of 2015. And guess what -- the next 3 billion smartphone subscribers will come primarily from emerging markets such as Asia-Pacific and the Middle East and Africa.

While the growth of mobile has been fast, the market is still not even close to becoming saturated. Microsoft's success in emerging markets could help propel it to be a serious contender with Android and iOS in the smartphone market. What's more, taking an outsized share of the market growth over the next five years could provide benefits to the entire ecosystem of Windows devices, since Windows 10 is designed to work similarly across all types of computing devices.

Investors should look for Microsoft's OEM partners to develop hardware specifically aimed at emerging-market customers interested in using Continuum. That would be a good sign that Nadella's vision is working.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Gartner. 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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