Microsoft’s ventures into phones have never worked (Australia was mercifully spared from the ill-fated Kin), but this deal just might change the game. Whatever the case, it means Windows Phone will be an even more serious player.
This will particularly be the case if Nokia’s Stephen Elop replaces Ballmer as head of Microsoft. Elop knows Microsoft well – he ran the Office division before going to Nokia in 2010.
But ultimately, it’s all about numbers. According to Gartner, Windows Phone still has only 3.3% market share of the smartphone market, shipping 7.4 million units worldwide last quarter, most of them Nokia Lumias.
But that was up from 4 million and 2.6% market share the previous quarter. BlackBerry and iOS, which occupy the space Windows Phone is targeting, are both experiencing a declining market share. Microsoft is saying it can get to 15% by 2018 (see below).
Windows on PCs is still the operating environment of choice for most corporates, though few of them have moved to Windows 8. As many enterprises struggle with Android’s security issues and worry about BlackBerry’s longevity, and as overpriced iPhones fall off the pace, Windows Phone is an increasingly viable alternative. Now it is even more attractive.
It is interesting that Microsoft is also acquiring Nokia’s feature phone business. Will they end up running some sort of Windows Phone Lite? All phones will eventually be smartphones, so we will probably see an evolution of these low end phones into Windows Phone devices.
For an insight into Microsoft’s thinking, have a look at the slick 30 page PowerPoint presentation that accompanied the announcement:
The presentation talks of ‘Nokia and Windows Phone Momentum’, quoting numbers about the same as the Gartner data above. It then says that Windows Phone has achieved the number three position in smartphones globally. True, but it doesn’t say that it is a very distant third behind Android and iOS.
There are a few telling phrases in the presentation. “Success in phones is important to success in tablets,” it says, followed by the telling “Success in tablets will help PCs.” That may show you where Microsoft’s mind is at. And did you know that “the acquisition reduces friction moving forward?” That’s good to know.
The presentation says that Microsoft currently gets less than $10 in royalties from every Windows phone sold, and compares that to the more than $40 margin on each smartphone sold, leading to “operating income breakeven when smart device units exceed 50 million.”
That’s way more than the current figure. The presentation projects that global smartphone shipments in 2018 will be 1.7 billion. That’s a reasonable assumption – they will be about a billion this year, on Gartner’s figures. But here comes the crunch – Microsoft says its “assumed market share” in 2018 will be 15%, up from 3.3% now. It doesn’t say how it will get there.
On those numbers, Microsoft believes it can sell more than 250 million smartphones a year by 2018, more than the number of iPhones now being sold. It figures on about $180 per phone, or revenues of $45 billion.
Microsoft’s current revenues are $78 billion. See the logic? All Microsoft has to do is quintuple the market share of Windows Phone.
Shouldn’t be too hard - should it?