Should Smartphone Vendors Worry About 'Microdroid'?

| About: Microsoft Corporation (MSFT)

Microsoft (NASDAQ:MSFT) may be starting to flex its muscles in mobile even as the Nokia handset purchase is delayed by a tax issue in India. In its history, Microsoft has disrupted many industries and in the process caused pain and suffering for many companies that dared to compete with them. Word Perfect, IBM's OS2 operating system, Netscape, Lotus 1-2-3, and Apple Computer (in the days it was known as Apple Computer) found themselves struggling as Microsoft embraced its typical but quite brilliant strategy, of "collaborate, extend and then eradicate" as I would describe it.

In 1984 Microsoft was collaborating with IBM to develop a new operating system called OS2 when it released an extension to its ubiquitous MS-DOS command line OS which it called Windows. In 1987 Microsoft released its version of OS2 to original equipment manufacturers ("OEM's). Then in 1990 Microsoft released a suite of productivity applications including MS Word and MS Excel it called Office. The Windows extension of DOS was buggy and not really a success until October 1990 when Microsoft released Windows 3.0 which was not much more than a "shell" for DOS commands in a graphical user interface ("GUI"). Windows 3.1 changed all that and became more of a real OS in its own right.

MS-DOS itself followed a collaborative effort with IBM in 1980 when IBM contracted with Microsoft to develop a version of its CP/M OS for personal computers. Microsoft at that time had been working on its own version of Unix called Xenix.

I was a DOS user and a command-line aficionado before OS2, used OS2 for quite a while but owing to a lack of applications switched to Windows at about the time Microsoft released Windows 3.1. Over time Word replaced Word Perfect and Excel took over from Lotus 1-2-3 and today those packages are history.

In similar fashion, a freely distributed Internet Explorer made short work of Netscape a few years later. I am largely relying on my memory for this little history lesson and if I am off a bit here and there on the dates I ask readers to forgive me.

Today, squibs in the news suggest Microsoft may be at it again. First, there was the leak of an Android OS Nokia phone called "Normandy" that has an interface like the Windows Phone OS.

Photo: The Verge

Next, there are rumors that Microsoft will bring Android apps to Windows. Google (NASDAQ:GOOG) has exited the hardware business with its sale of the Motorola handset business to Lenovo announced a short while ago and is no longer a mobile hardware vendor. My guess is that Google's real interest is in the revenues from its Search and Maps applications in mobile and its share of revenues from Google Play. All of those would be larger if more devices could run Android applications and were pre-loaded with Google Search and Google Maps applications.

Microsoft's Bing search competes with Google but there have been rumors that Microsoft might dump Bing. If so I expect Microsoft would replace Bing with Google.

A scenario that is bullish for Microsoft and Google but quite bearish for other smartphone and tablet vendors unfolds as follows:

  1. Microsoft puts the kibosh on Bing and enters into an agreement to use Google as the search engine in all of its applications;
  2. Microsoft makes all software changes to have Android applications run seamlessly on Windows desktop and mobile devices; and,
  3. Google provides Microsoft's Android enabled devices with full access to Google Play.

The financial impact on each company could be material.

Microsoft reportedly has lost $10.9 billion on Bing since 2005 and continues to lose money. Replacing it with Google might eliminate losses without any loss of function in the applications. Even a break even is better than losses of hundreds of millions each year.

Microsoft device sales would be enhanced by deal. With a full library of Android apps able to run on Windows, you might see Microsoft move from single digits to something like a 12% to 15% share of the device markets, selling perhaps as many as 120 million to 150 million smartphones and tablets, more than doubling current volumes. With Microsoft earning something like $30 or $40 for each device, the move could at $2 to $3 billion to Microsoft revenues.

The bulk of the increase in Microsoft sales would likely come from Android device makers and some might come from iOS. The combination of Android applications and Microsoft enterprise software might be the key to persuading mobile users to shift to Microsoft devices in significant numbers. Think it can't happen? I think there is enough at stake for Microsoft and Google that it just might.

I have no current position in Microsoft or Google, having disposed of my Microsoft calls on its recent strength.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MSFT over 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.