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AdDuplex Brings Bad News for Microsoft Windows Phone

By Jamal Carnette, CFA - Jan 31, 2016 at 9:41AM

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The most-popular Windows Phone is three years old.

Microsoft's high-end Lumia 950 is struggling to win market share among Windows Phone users. Source: Microsoft.

It's safe to say that Microsoft (MSFT -0.26%) has experienced a resurgence under new CEO Satya Nadella. Prior CEO Steve Ballmer's rein was defined by the "lost decade," where the stock tremendously underperformed the broader market, as a combination of valuation compression and the failure to properly adjust to mobile weighed on Redmond.

In order to make up lost ground in mobile, Ballmer aggressively moved forward in devices. In tablets, Microsoft pushed forward with two versions -- the Surface Pro and Surface RT -- the latter of which resulted in a near $1 billion inventory writedown, and sealed Ballmer's fate. Ballmer was even more aggressive in smartphones, buying then-partner Nokia's smartphone business in April 2014 for $8.0 billion, cash included.

The result? Another writedown.

Last fiscal year, Satya Nadella took a $7.5 billion impairment charge for the purchase. A new report from AdDuplex gives insight into how poor Microsoft's smartphone performance has been. The most-popular Windows smartphone is the Lumia 520, a three-year-old model.

Pre-Microsoft Lumia has the largest market share
According to AdPlex's data, the Nokia Lumia 520 is the most-popular model with Windows Phone users, with a worldwide 12.9% market share. The Lumia 520 was released in April 2013, and was discontinued last year. Additionally, Microsoft's next-gen entry-level 5-series model -- 2014's Lumia 535 -- takes 11.7% market share. The newest Windows 10 Mobile operating system is struggling, as well, and only has a 9.5% market share versus the Windows Phone 8.1's dominant 78% share.

Worldwide, the newest Lumia, the Lumia 640, has a reported 6.3% Windows share, and the high-end Lumia 950 is lumped into the catch-all others category, with a market share less than 3%. In the United States, things are slightly better for Microsoft -- 2015's Lumia 640 has an 18.2% share, but still trails a two-year old Lumia 635 that has nearly 31% of the market.

The purchase appears to not have brought any benefits
You can't blame Ballmer for looking into buying Nokia's handset business. A year before the company announced its intentions, Alphabet (nee Google) purchased Motorola Mobility for $13 billion. The threat for Microsoft was that Google would become another Apple -- a device, software, and services giant -- and further cement Microsoft's legacy as a dinosaur that missed the boat in mobile.

Very soon after, Microsoft announced the purchase, even before it closed the deal. Alphabet essentially admitted defeat and sold the device business to Lenovo for $3 billion (although it kept many valuable patents) after reporting consistent quarterly losses from the division. What should have been a warning to Microsoft was advice not taken, and ended up costing the company nearly the entire purchase price.

More recently, Nadella has been redefining mobile success on its own terms. Interestingly enough, Microsoft has started to change its fortunes in tablets with the Surface starting to show signs of life. However, it doesn't seem as if this success will be duplicated in smartphones anytime soon.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamal Carnette owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (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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