Readers will know that I have often been rather critical of Microsoft's (NASDAQ:MSFT) efforts with Windows Phone (WP) and more impressed with Nokia's (NOK) efforts. However, in the last few weeks, evidence that the two have developed a decent synergy has been seen in many positive news stories. This includes most significantly the Kantar Worldpanel figures which show WP sales share increased in the US to 5.6% and the 5 major EU countries to 6.7% in April. This 60%+ growth in sales volume year-on-year is due to several underlying causes which form the basis of this article.
Red Oceans Or Blue Oceans
Rather than merely recap the news stories, I've approached this slightly differently. For me, business news stories tend to be the symptoms of something deeper that is happening. They give us facts and figures, but they don't say why something occurred. When it comes to business positioning, one of my favorite books which explain these underlying causes is "Blue Ocean Strategy" by Kim and Mauborgne.
In this book, businesses are divided into two types, "Red Ocean" and "Blue Ocean," based on their following characteristics.
I'd invite readers to consider which companies fit these examples and if they can, Nokia and Microsoft in particular. My personal favorite for a Red Ocean company is YKK Group. This company manages to produce more than half of the world's zippers. If you've ever come across "YKK" written on your zipper (and everyone has), this company made it. YKK produces a standardized commodity product with a clearly defined target market (clothes manufacturers) and excels in the market place by producing the cheapest high quality zippers in the world.
Blue ocean companies, on the other hand, create their own market. These companies are the entrepreneurial force which have made the modern world and can be seen all around us. One example of this used in the book is Cirque du Soleil.
The reason I inserted that photo is because it is very difficult to describe Cirque du Soleil simply. For one, it has "circus" in the name. However, it is unlike any other circus we can think of. Then, if we think of acrobatics, they seem unlike anything found in the Olympics. Quite simply, Cirque du Soleil has managed to create its own market by offering something completely unique. To paraphrase Kim and Mauborgne, "they have created and captured their own demand." We can see this with ticket prices which range upwards from $80, 100 times more than a circus which visited my local park recently.
Is Windows Phone Red Ocean Or Blue Ocean?
So, now we've established the parameters, we have a basis on which to consider Windows Phone. Kim and Mauborgne consider Blue Ocean strategies to be superior to Red Ocean. Personally I do not share this belief and think that all companies must compete to a certain extent in existing market places.
So when we consider Windows Phone, we know it competes in the smartphone sector, a definable market which is regularly analyzed by market research companies like IDC, Gartner and Kantar Worldpanel. We also know the chief competitors, Google's Android (NASDAQ:GOOG) and Apple's iOS (NASDAQ:AAPL). This does seem to be "Red Ocean." However, it is difficult to tell what the other aspects are without considering Microsoft and Nokia's advertising and how they position their product.
Windows Phone Red Ocean Strategies
Back in October 2012, Joe Belfiore, Microsoft's Windows Phone head, stated that the operating system had 46 out of the top 50 apps available on the iPhone. This statement was meant to indicate that the Windows Phone ecosystem was vibrant with the ability to compete with Apple. I personally found this statement problematic. The first is the obvious reason that 46 is less than 50. If the quantity of apps is what a consumer is after, then if all other things are equal, it is rational to pick an Android or Apple phone over Windows Phone. The second is slightly less obvious but apparent in hindsight. The metric that Joe Belfiore used actually set up Windows Phone to fail. If it took into account the top 50 apps of another platform, Windows Phone will naturally always have less because what consumers want with an iPhone will be different to what consumers want on a Windows Phone. So for example, one of the top apps in the WP store is "WPCentral." This app for WP related news is naturally not available on iPhones.
However, while this shows the limit of this particular strategy, it did have one important benefit. By directly comparing itself to the iPhone, Windows Phone gained credibility for itself and became worthy to be ranked as a "smartphone," something which would have been extraordinarily difficult without these popular apps.
A much better Red Ocean strategy has been the "Windows Phone Challenge."
Source: Microsoft India
In this ongoing challenge, ordinary people are invited to compete in completing certain tasks with their (Non-WP) phone against someone using a Windows Phone. The winner is the person who completes the task quickest or gets the best result. This campaign takes several forms and can be played in person at Microsoft stores in the US and at kiosks around the world. There are also several low-budget but personable adverts on YouTube around this theme. This is a perfect campaign for introducing a new product with low awareness levels in the marketplace. When a shopper considers an iPhone as their next smartphone, due to its ubiquity, they can easily borrow a friend's to see if it suits them. This is not the case for potential WP customers so campaigns such as these are great at getting phones into their hands and helping them see the potential benefits of the platform.
Yet even campaigns like this are not enough on their own. For WP to truly succeed, it needs to differentiate itself. Something we are seeing more and more evidence of recently.
Windows Phone Blue Ocean Strategies
As I discussed in my last Nokia article, Nokia has a difficult job in marketing its phones. It is one step removed from its consumers so it must aim more at increasing awareness of its products rather than offering specific promotions. Working within this constraint, the following advert launched May 28th which appears to be a collaborative effort involving Verizon (NYSE:VZ), Microsoft and Nokia is perfect.
Source: Microsoft USA
What this advert does is to fully exploit the advantage high-end Lumia phones have over their competitors in low light photography with a humorous infographic.
We can see more attempts at setting Windows Phone apart from its competitors in another advert which went viral and has so far gathered nearly 6 million views. In this commercial, Android and Apple users battle each other while a pair of Windows Phone users look on aloof from the struggle.
Campaigns such as these break the cost/value competition which Android manufacturers have found themselves struggling with. Regular browsers of technology sites will often find comparisons of how much RAM one Android model has versus another or other such specifications. The implications of this are that all Android phones are effectively the same and to find value for money, a customer seeks the best specifications for the lowest cost. This is an archetypal Red Ocean strategy and something Microsoft and Nokia do not want.
Instead, by raising awareness of features competitors do not even have, Microsoft and Nokia succeed in redefining the marketplace. This refocusing away from specifications also does something interesting. It helps Nokia to control its costs. So to give an example, the Lumia 925 is a high-end Windows Phone but has worse CPU/RAM/Memory specifications than the HTC One (OTC:HTCKF). Yet, the aim of Nokia and Microsoft is to make the L925 compete in an entirely different marketplace, one which consists only of Windows Phone in the eyes of consumers. This reduces the focus on absolute specifications in the smartphone market and lets Nokia concentrate on the relative specifications between its different Lumia phones.
There is one more Blue Ocean strategy which Microsoft finally appears to be gaining traction with. I have previously complained of the lack of XBOX titles on Windows Phone. These are games which are either completely unique to Windows Phone or have "achievements" unavailable on other platforms. What bothered me most wasn't the lack of third party development, but the fact that Microsoft Studios, the game development arm of the company, didn't appear to be investing much time and effort into the ecosystem. Furthermore, it took the counter-intuitive step of releasing Wordament, a popular free word game onto iOS, back in December 2012. This seemed to indicate a lack of faith in the viability of WP and removed a small differentiating factor between the two platforms.
Yet over the last few weeks, it has slowly been increasing its development on WP with a welcome increase also in third party XBOX games coming to WP. While not all of its key brands such as Forza and Gears of War are on Windows Phone, Halo, the biggest franchise of them all, will soon be coming to the platform. It is difficult to underestimate how big Halo is in the gaming world. The last instalment had over $300 million of sales in its first week alone making it more than comparable to Hollywood blockbusters. Not coincidentally, it is also in the process of being made into a Steven Spielberg produced TV series.
I would really like Microsoft and Nokia to continue to push the Halo franchise on Windows Phone as it serves as a key differentiator between WP and its competitors. With the advent of XBOX One, the new gaming console, there is also plenty of scope for cross-promotion between the two platforms. This includes, for example, continued development of "second screen" WP apps such as XBOX Smartglass which are designed to be used as complementary apps to the console.
According to Kantar Worldpanel, 75% of Windows Phone users have come from different platforms. This is a very high figure and must be managed carefully. The major positive is that we can conclude that the advertising Microsoft and Nokia are engaged in is indeed working. It also means there are a lot of new customers on the platform whose expectations that the two companies now need to fulfil. One blogger, who has been on the platform for two years, compiled a comprehensive list of flaws that he feels WP still needs to tackle. This includes the lack of a "Notification Center," something which he was happy without at first but became increasingly irksome over time. On a personal note, when I sometimes feel my WP L920 vibrate, by the time I have had a chance to look, I find no evidence of why my phone vibrated. With a notification center, this unnecessary element of mystery is removed and would help increase the retention of hard-won new customers. Another flaw which perhaps merits a separate article is the limited enterprise support. This includes the lack of VPN capability. If readers have the time, I would kindly ask them to read through some of the extensive complaints on this petition asking Microsoft to implement VPN. One of the most recent comments is from a network administrator who states he has had to switch over to a Samsung for his work and has given his brand new L920 to his wife. There are many such disgruntled comments which Microsoft needs to tackle as quickly as possible.
However, these shortfalls do mean that WP is in serious danger. I was previously uncertain if WP had the capability to be viable in the long term. From my perspective, the rise in WP figures has been much swifter than expected. On June 4th, Canalys estimated that by 2017, Apple and Windows Phone will be hovering around the same market share of ~14%. I actually have a feeling that by this time next year, Windows Phone will have exceeded the iPhone in several major markets and hit this target in these markets 3 years ahead of schedule.
This is predicated on Microsoft and Nokia continuing to develop Windows Phone to successfully differentiate themselves in the marketplace through Blue Ocean strategies and to remove the flaws from Windows Phone making it a much smoother user experience.
With the rumored 41-megapixel cameraphone "Eos" around the corner and several WP updates including GDR2, GDR3 and the pivotal Windows Blue in the works, I think the two companies are on the right track to make this happen.
Disclosure: I am long NOK. 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.