Apple (AAPL) proved it’s possible to succeed in the smartphone market with your own mobile operating system tied to a single hardware supplier — in Apple’s case, itself. Nobody is going to call the iPhone or iOS a failure.
Microsoft (MSFT), on the other hand, has faced an uphill battle to push Windows Phone into relevance while relying on Nokia (NOK) to the point that MSFT bought the company’s smartphone division to bring it in-house. The re-release of HTC’s popular One M8 smartphone as a Windows Phone device shows a new route for Microsoft to grow its mobile business. Instead of struggling to sign up manufacturers to develop devices specifically for its operating system, simply re-release popular Android smartphones with Windows Phone onboard.
Android vs. Windows Phone
Google (GOOG) achieved smartphone market share domination by giving away its Android operating system to manufacturers. The license fee Microsoft was charging for Windows Phone — reportedly in the $20 to $30 per device range — may not sound like much, but with most manufacturers losing money or breaking even at best on their smartphone businesses, that cost was more than enough to put them firmly in the Android camp.
By the time Microsoft began offering discounts and even waiving the license fee, it was too late. According to Strategy Analytics, Windows Phone marketshare slipped from 4.1% in Q3 2013 to just 3.3% in Q3 2014.
Saddled with license fees and low market share, Microsoft has struggled in convincing manufacturers to release Windows Phone exclusive devices. The only real success it had there was with Nokia’s Lumia smartphones.
Lacking must-have devices and with a minuscule share of the market, Microsoft has to work twice as hard to persuade consumers to consider a Windows Phone smartphone.
Why Does Microsoft Care About Windows Phone?
Besides the fact that Microsoft would have a gaping hole in its product line-up if it lacked a mobile OS, there is a lot of ad revenue at stake.
According to eMarketer, mobile ad revenue is on pace to hit over $31 billion this year. In the most recent quarter, Android smartphones and Apple iPhones each accounted for over one third of that revenue, while Windows Phone snapped up a paltry 0.13% — an even poorer showing than BlackBerry (BBRY).
With a smartphone running Windows Phone, search defaults to Bing, and owners have to work harder to use Google products, which means Microsoft gets a bigger chunk of the ad revenue generated by that device.
The HTC One M8 Windows Phone Solution
What happens when you start waiving OS licensing fees and stop demanding Windows Phone exclusives?
You get the HTC One M8 running Windows Phone.
I had the chance to review an HTC One M8 earlier this year and it remains one of my favorite Android smartphones. A lot of people agree. Like many Android smartphones, this one has a Qualcomm (QCOM) Snapdragon processor and it just so happens that Qualcomm worked closely with Microsoft during Windows 8 development to ensure Windows Phone would run on Snapdragon CPUs.
Sales of the HTC One M8 are fading. The smartphone was released early in the year and now competes against newer Android devices like the Samsung (SSNLF) Galaxy S5 and Moto X. HTC and other manufacturers also face direct competition from Google with its Nexus phones.
HTC and Microsoft chose a novel tactic to try boosting sales and goosing Windows’ market share. Release a version of the HTC One M8 running Windows Phone.
The idea is not as crazy as it sounds. The hardware is identical to the original Android HTC One M8. So, the manufacturer didn’t have product development or manufacturing ramp-up costs. Windows Phone is already compatible with the Snapdragon CPU. The camera app has been rewritten for Windows and HTC ported some of its features like BlinkFeed as Windows Phone apps, but expenses and effort would be minimal compared to a traditional smartphone launch.
The HTC One M8 is a tried-and-true design and popular with consumers. With Microsoft promoting it as a Windows Phone device, HTC gets a shot at giving the aging flagship smartphone a second wind. Microsoft may lose some Lumia sales as a result, but any move that could grow Windows Phone market share is a win in the long run.
And if the HTC One M8 experiment succeeds, other Android smartphone manufacturers could follow suit. Imagine a Galaxy S5 running Windows Phone — you can bet Microsoft has. Anyone who bought an Android smartphone because they prefer something like the HTC One M8 or Galaxy S5 over the design of a Lumia could have the choice of buying a Windows Phone flavor version instead.
If an Android smartphone fails to catch on in a crowded Android market, with minimal expenditure from the manufacturer it could see second life as a Windows phone. That’s a compelling fail-safe for smartphone makers.
The Apps Problem
More hardware choice doesn’t overcome Windows Phone’s other fundamental challenge: apps.
As The Verge’s Dan Seifert points out in his review of the HTC One M8 for Windows, Microsoft’s Windows Phone store offers just over 300,000 apps. That’s a third of what’s available for iOS or Android. And many of the mainstream apps that have made it to Windows Phone are behind in their features compared to the versions on iPhones or Android smartphones.
Of course, developer support for apps and mobile OS market share are a chicken-and-egg kind of issue.
The move by Microsoft and HTC may just move the needle on Windows Phone adoption, and if Microsoft can sustain any upward momentum, that will spur developers to pay more attention to the platform. Whether it works or not, at just 3.3% of the smartphones sold this quarter (and sliding), Microsoft had to do something to kickstart interest in Windows Phone. Plus, HTC needs all the sales it can get. The HTC One M8 for Windows is a low risk, inexpensive way for both companies to stir the pot.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
