- Segment leader Apple has a 43.6% share of the U.S. smartphone market.
- Android has hit nearly 90% market share globally.
- Where does Microsoft fit into this equation?
Microsoft (NSDQ:MSFT) and Alphabet Inc (NSDQ:GOOGL) are the two companies that burnt their fingers big time in trying to go the Apple way to become hardware+software companies, but by taking the acquisition route. As a result, both companies were forced to write off billions of dollars after their Nokia and Motorola acquisitions, respectively, did nothing to cement their respective positions in the smartphone world. But despite the setbacks, both the companies have been extremely reluctant to throw in the towel when it comes to hardware. So how will Microsoft's journey here be? And why an investor of Microsoft stock should know about it. Here's why.
Google and Microsoft in the Smartphone Fray
Alphabet, Google’s parent company, recently launched Google Pixel, its first ever self-branded smartphone, in the high-end luxury smartphone category to square off with iPhone. The Pixel’s price point is a good indication of which segment the company wants to target.
On the other side, Microsoft has slowly been building its Surface device portfolio in the last few years and has lot of plans for the future as well.
But why would Microsoft and Google, after losing money and face in the smartphone battle, refuse to let go of their hardware ambitions? The one-word answer to that is Apple. As long as Apple remains as the one company that can successfully create software and match it with even better hardware, it will be extremely hard to stop them. Despite the state of the smartphone market, Apple remains on top of the smartphone heap in the core market of the United States.
That might change when more data comes out next January, but neither Google nor Microsoft will have a place on that list for at least the next couple of years.
The Challenge ahead of Google
The problem for Google right now are the third party smartphone manufacturers who are carrying the weight of Android on their shoulders. The software is an excellent piece of work, and if they want, companies can customize it for their own need - it's free and there is no other competitor in the marketplace that comes near it. Android is fast approaching a penetration of more than 90% of smartphones in the world, and it is only bound to grow from here as emerging market smartphone sales zoom upward in the next few years.
But what happens if somebody like Samsung builds its own mobile OS, keep improving it for the next five years and suddenly decides to give it to other manufacturers as well. Being a mobile phone manufacturer, it might seem like a farfetched idea but you never know for sure, as there are other benefits that can come along its way if the company takes that route. It’s a hypothetical example, but not something that’s impossible to imagine. Samsung has already made a start with Tizen OS and, even though they haven’t seen the kind of traction they would like with that operating system, let’s not forget that it is, after all, an open-source application. Besides, as of last year, they’ve already overtaken BlackBerry as the fourth largest OS platform in the world.
“According to the latest published report from our Wireless Smartphone Strategies (WSS) services: Global Smartphone OS Market Share by Region : Q3 2015, Android registered a slight year-on-year increase in market share, while Apple gained traction, driven by strong demand for new iPhone models. Microsoft, BlackBerry and Firefox drifted down, while Tizen posted tangible growth and overtook BlackBerry being the fourth largest OS platform for the first time ever.”
Apple’s Immunity in the Smartphone Market
But no matter who does what, Apple and its iPhone sales will keep chugging along like a freight train. Yes, they may have lost the maglev-train-like speed they had in the past, but they are going to keep pulling full steam ahead for many years to come - even if only because they have to do it until they build up their services portfolio and revenues to keep them on top. Regardless, disruption of their sales channel is not as easy as disrupting Android’s stranglehold.
Focusing on Microsoft’s Mobile Push
The reasons are more or less the same for Microsoft, but it’s more of a future game of survival. PC sales have gone down the tubes and may never recover to glory days, which means good times are more or less over for its multi-billion-dollar earner Windows as well as the mobile version, which has an extremely small presence in the mobile phone segment. The one shot they have to get Windows back into the mobility game is if they can keep improving their numbers in the smartphone market and, if that is not possible, at least in the tablet segment.
The real problem for Microsoft is that if they stop making hardware now, they will be back to square one. It’s going to be very difficult for them to convince phone makers to adopt Windows 10 the way Alcatel has done. They’re encouraging Lumia users currently on Windows 8.1 Denim to upgrade to Windows 10 Mobile, but that’s a very small segment of the market.
An Investor’s POV
For Microsoft, it is an extremely long road ahead - and one that may never yield results - but the company isn’t going to give up that easily. Their Surface line of products is picking up pace, and there are even rumors of a Surface Phone soon to hit the market. If they can push this agenda consistently for the next several years, they may finally be able to eat into iOS and Android market share. How long will that take? Maybe ten years, maybe twenty. But it looks like they’re ready to ride it out no matter how long it takes.
As an investor, you’re definitely looking at one of the longest shots possible. However, Microsoft has given us a lot of reasons to invest in their future - the least of which is their possible future success in the smartphone market. Their cloud infrastructure is growing at a rapid pace, as you saw in my coverage of their most recent quarterly earnings, and overall growth has once again started at Microsoft.
You’re not going to find Microsoft’s mobile push as a reason to invest in the company, at least not for the next several years. But the question is, do you really need it to be?
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