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The Pros And Cons Of Microsoft's Mobile Strategy

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Chris Lau, Kapitall Contributor: Microsoft was not always without a market position in the mobile space. In the beginning, before Apple’s (AAPL) iPhone was launched, Windows Mobile had a respectable market share. Microsoft only needed to compete with PalmOS and RIM (now called Blackberry), so having a 36% market share in 2007 was possible. Things are different now. While Windows Phone (now at WP8) grew its user-base, market share barely grew. [More Analysis by Chris Lau: 5 Companies to Watch as Smartwatch Rumors Circulate]

Growing in a Declining PC Market

As Microsoft continues to push out WP8, the company can continue to operate profitably in the declining PC market. Office productivity software could remain consistent, but Microsoft recently took a big misstep that could have hurt sales. Microsoft wanted to limit users to a single installation, so that a license would only work for one machine. After the customer outcry, Microsoft reversed this decision and will now allow licenses to be moved every 90 days.

Microsoft still faces challenges with its operating system. Windows 8 sales are off to a weak start. Investors could assume the rate of unit sales will remain low in the near-term.

Bing and Xbox

The profitless Bing unit ensures that Microsoft remains relevant in the search space. Microsoft continues to employ a strategy that worked for building a XBox franchise: operate at a loss until the company can reach a dominant market position. Xbox continues to be of strategic importance for Microsoft. The Xbox 360 gives users access to apps like Redbox, run by Coinstar (CSTR), and Netflix (NFLX). When the next-generation Xbox is announced, the company hopes it will be strongly positioned, at a time when game sales for consoles are on the decline.

Business Section: Investing Ideas

A recovery in shares of Hewlett-Packard (HPQ) shows that it is possible for the market to still have interest for companies transitioning away from the PC market. Chip maker Advanced Micro Devices (AMD) would benefit from a refresh in consoles. AMD will be supplying processor s for Sony’s PS4 and the Xbox 720 (if rumors about the latter are true):

Conclusion

Microsoft may be on a slow start in growing its mobile market share, but slow could still win the race. The company is partnered with Nokia (NOK), whose survival depends on the success of WP8. Both companies must beat Blackberry (BBRY) first. Otherwise, being a distant fourth place will prove to be a challenge for generating healthy profits.

Written by Chris Lau, Kapitall Contributor