Samsung And Nokia Will Cannibalize Windows 8 Phone Sales

| About: Microsoft Corporation (MSFT)
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On October 26, Microsoft Corporation (NASDAQ:MSFT) will release its much-anticipated Windows 8 software. According to Dan Costa and PC Magazine, Redmond is taking a "huge gamble" that the market will embrace this shift to effectively integrate the personal computer, tablet, and smartphone platforms under one Windows 8 operating system. Following this Windows 8 release, consumers will have the option to toggle through touch screen commands on desktop and laptop computers, before picking up smartphones and tablets that run Microsoft Office. Microsoft, of course, is hell bent upon manufacturing its own ecosystem to compete alongside Apple Inc. (NASDAQ:AAPL) and Google Inc. (NASDAQ:GOOG).

For the Microsoft ecosystem, executives and engineers eye the smartphone market as a catalyst for future bottom line growth. To drive Windows 8 phone sales, Microsoft has enlisted the help of both Samsung (OTC:SSNLF) and Nokia Corporation (NYSE:NOK) as handset makers. The foibles within this technical motley crew, however, will only serve to reveal the inherent weaknesses of Microsoft's business model. Microsoft is beta.

The Smartphone Market

Apple's "I'm a Mac - I'm a PC" campaign fired the opening salvo declaring today's Web 2.0 consumer electronics war. In these commercials, Apple personifies itself as a chic, yet functional hipster. Alternatively, Microsoft is a dowdy company man who cannot get out of his own way. To back such image-oriented claims, Apple continues to refine blockbuster iMac, iPod, iPhone, and iPad product lines that dominate select sectors of the marketplace. Beneath the shadow of Apple's success, Microsoft is left to battle flagging brand loyalty, stalled PC sales, and a relatively non-existent smart phone market presence.

During its latest third quarterly period ended June 30, 2012, Apple reports sales of 26 million iPhone units. For Q3 2012, Apple tallies $16.2 billion in iPhone related revenue, which accounts for roughly half of Apple's $35 billion total net sales during the period.

Apple's robust financials are indicative of a smartphone market largely controlled by the Apple iOS and Google Android operating system duopoly. Taken together, research firm comScore estimates that the Google Android and Apple iOS account for more than 85% all U.S. smartphone subscriptions.

Research In Motion Limited (RIMM), Microsoft Windows, and Nokia Symbian are desperately clawing over the remaining table scraps of the telecommunications customer. For the calendar second quarter of this year, Microsoft Windows phones carry a meager 3.6% share of the smartphone market. During this latest quarter, Microsoft's actually lost four-tenths of a point in share in comparison to Q1 2012. Microsoft's precarious position is further complicated by the fact that Samsung hails as the world's leading handset maker.

On October 24, Samsung lost the U.S. District Court battle in its contentious war against Apple. In the aftermath of this case, a San Jose jury ordered Samsung to pay $1.05 billion in damages to Apple for patent infringement. The final verdict specifies that Samsung handset and tablet devices running Android violate touch screen, search, zoom, and design patents applicable to the Apple iPhone. Although Samsung will appeal this decision, its entire product line is effectively in danger of being banned from the United States. If anything, the Apple-Samsung case will confuse buyers, while also forcing Windows phone technicians to engineer abstract designs merely to avoid the gavel.

Meanwhile, Microsoft's initial flirtation with Nokia is already doomed for the scrap heap. One year ago, Microsoft executives literally boarded a plane for Finland and deposited suitcases lined with cash at Nokia headquarters. This past spring, rapper Nicki Minaj danced the night away at a Nokia Lumia 900 release party against a Times Square backdrop. According to Jeff Bradley and AT&T, the Lumia 900 launch was set to perform as a "notch above anything [AT&T] has ever done." In April 2012, AT&T hawked Lumia 900 Windows phones for $99, in exchange for locking customers into two-year service plans. As an added bonus, Nokia paid out $100 rebates to first-movers as compensation for a minor technical glitch. After effectively giving these phones away for one month, Stephen Elop, Nokia CEO, describes Lumia sales as "mixed."

In response, Microsoft has already thrown its Nokia partner under the bus. The Wall Street Journal reports that Microsoft refuses to offer Windows 8 updates on existing Nokia phones, while concurrently agreeing to provide the Windows operating system to Chinese handset maker Huawei Technologies. Nokia is now locked into an agreement that forces it to compete against global original equipment makers (OEMs) for Windows phone sales at various price points. Samsung's ingenuity, of course, looms large as the biggest threat to sales.

Nokia and Samsung Windows 8 Phone Specifications

Last month, Samsung revealed its ATIV S phone at the IFA trade show in Berlin. Samsung's ATIV S phone is the first Windows 8 prototype to be unveiled and is likely to launch prior to this Holiday season. Weighing in at 135 grams, the sleek ATIV S phone is 5.4 inches high by 2.8 inches wide and a mere 8.7 millimeters thick. Rather than plastic, Samsung has embraced a brushed aluminum finish for this phone. Besides ubiquitous Windows logos, the ATIV S looks eerily similar to the Apple iPhone in terms of physical aesthetics.

Samsung's Windows 8 phone features a 4.8-inch Super AMOLED screen that displays graphics at 720x1280 resolution. Qualcomm's Snapdragon dual core 1.5 GHz processor powers the Samsung ATIV S. This phone can convert into two separate 8-megapixel and 1.9-megapixel cameras and record video at 1080p. Separate versions of the ATIV S will offer 16GB and 32GB in built-in storage.

Nokia is now scrambling to promote its own Windows 8 phone in response to Samsung's buzz generated at Berlin. Scheduled for a calendar Q4 2012 launch, the Nokia Lumia 920 is an attractive phone that comes in various colors across the spectrum. The Nokia 920 weighs 185 grams and is somewhat sturdier than the Samsung ATIV S handset. In terms of dimensions, Nokia's Windows 8 phone stands 5.1 inches tall by 2.8 inches wide. The Lumia 920 and its 4.5-inch screen display graphics at 1280x768 pixel resolution. As a camera, Nokia's Windows 8 phone takes pictures with an 8.7-megapixel camera.

The very same Qualcomm Snapdragon processor that powers the Samsung ATIV S also drives the Nokia Lumia 920. This Nokia phone packages 32GB in memory capacity. With such similar specifications, both Samsung and Nokia Windows 8 smartphone offerings are likely to retail at the $100 price point, if customers agree to the terms and conditions of a two-year wireless provider service contract. Samsung and Nokia will cannibalize Windows phone sales, largely due in part to the lack of differentiation between the ATIV S and Lumia 920 phones.

The Bottom Line

U.S. investors can attempt to leverage Windows 8 phone sales through both Nokia and Microsoft stock. At $2.38, Nokia stock is effectively a highly volatile call option. On July 19, Nokia closed out its second quarter books with $286 million in losses. These quarterly losses come on the heels of Nokia's $1.3 billion loss for Q1 2012. Nokia's weak financials are the result of the company's staggering 39% decline in year-over-year smartphone unit sales. Nokia is fighting for its corporate life, with minimal cash flow alongside $10.9 billion in cash and $6.6 billion in interest bearing liabilities on its balance sheet. Nokia stock will collapse further towards zero, in the aftermath of a projected tepid launch for this Windows 8 phone. According to Ramon Llamas of IDC, the Lumia 920 "will not be a breakthrough change on Nokia's design."

Alternatively, Microsoft is a known cash cow that boasts of a AAA credit rating that is part and parcel of a nominally pristine balance sheet. The stock market, of course, is a pricing mechanism that discounts future profit growth. Over the past five years, Microsoft profits have stalled out near the $17 billion watermark. The Windows 8 smartphone movement will do little to move the net income needle at a $260 billion software juggernaut. Microsoft is effectively a utility stock that lords over the PC market, tracks the S&P 500 Index, and pays out regular dividends.

Microsoft is a beta stock.

Disclosure: I am long AAPL. 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.