Microsoft Finally Gets How To Grow Windows Phone

May.21.13 | About: Microsoft Corporation (MSFT)

Frankly, I don't know what took them so long, but with the initial response to the Nokia (NYSE:NOK) Lumia 520/21, Microsoft (NASDAQ:MSFT) is finally acknowledging publicly that the key to winning market share in the U.S. is through the low-end of the market by providing a superior experience for a better price than what is currently offered by either Apple (NASDAQ:AAPL) or the gaggle of Google (NASDAQ:GOOG) Android OEMs.

Speaking at Mashable, Windows Phone Marketing Chief, Greg Williams, made clear what I've been banging on about for months. The U.S. market is ripe for the plucking at the low-end of the price curve. There are a number of reasons why this is true and Williams touches on a couple:

  1. Smartphone penetration in the U.S. is still low at ~50%
  2. Rising off-contract handset sales now that the smartphone has come down to price points that are affordable to the mass of feature phone users who have yet to upgrade.
  3. Improving quality of low-end handsets.

To this I would like to add the fact that the U.S. economy is functionally deteriorating in the lower and middle economic strata and because of this price sensitivity for connectivity and entertainment is rising. The cable industry knows this all too well. The mobile carriers are finally admitting that cell tower minutes have little to no value and that data is the thing they need you to pay for. T-Mobile moving completely to pay-as-you-go and cost transparency for device costs are a perfect example of this trend.

I've criticized Microsoft for its hero phone strategy - getting a Windows Phone to be the featured phone at the various carriers like AT&T (NYSE:T) - but only in the context of their not having a truly compelling budget phone to drive volume. The Lumia 820 was doomed to be nothing more than a carrot to get people interested in the 920. With both HTC and Nokia not bringing their initial budget phones, the 8S and Lumia 620, to the U.S., I have to believe it was Microsoft trying to compete with Apple to create upscaling to the Windows Phone brand in a market where the economics were moving against the Cupertino giant.

Now that they have proof of just how starved the low end of the smartphone market is for a high quality device at a sub-$150 price point, light bulbs are going off in Redmond. With the next Xbox due to be revealed soon and, if Charlie at Semiaccurate is correct (registration required to read the entire analysis but even the stub gives enough of a hint), then Microsoft's living room strategy will be less about high-end gaming and more about social connection, integration and casual gaming. So, do you think it would behoove them to have a few million more people using their platform on a smartphone?

Simply put, even for this Windows Phone bull, Microsoft has taken way too long to come to their senses about what their growth strategy for Windows Phone should be in the U.S. When you are as far behind in the numbers game as they are, a point I laid out in detail previously, waiting nearly 8 months to begin aggressively attacking the growth segments of your product's market is simply inept.

I bang on this because Windows Phone has yet to grab enough market share to be a sustainable endeavor, not just in the U.S. but worldwide. Emerging market growth where they have broken through the early adopters and are on the verge of climbing into the early majority is the encouraging part. In the U.S. the platform has to reach the 15-16% of sales figure in a quarter to begin reaching that audience. Microsoft has the resources to get Windows Phone there, while other platforms like BlackBerry (NASDAQ:BBRY) and Firefox/Ubuntu do not. They simply will not get there without an all-out push to the low end of the market to drive volume.

The fact that Apple did this while selling a $600 device in the iPhone is nothing short of astonishing. But, the market today is different and, like it or not, Windows Phone is not going to take significant share from the iPhone until and unless Apple makes a fatal error. All Microsoft and Nokia can do is lie in wait. Therefore, the better strategy is to go after the soft-Android users and potential customers. There are, by the law of large numbers, millions of them.

And, since it looks like there will be a window of opportunity for them to gain share now ahead of the 2013 back-to-school and holiday seasons, I have to say better late than never. If Apple does not have an iPhone 6 up for this year, then that window is broader, but again, volume sales will not happen there regardless. So, given the gains they've made to this point, Microsoft should be sending Nokia's designers flowers and chocolates every day because without them and their redefining style of the slab phone, Bill Gates would not be the richest man in the world again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have a Windows phone. I will upgrade to a Lumia 521 soon.