It's no secret that Microsoft
(MSFT) is feeling the heat from Apple's
(AAPL) iPhone and Google's
(GOOG) Android smartphone platforms.
While Apple is wooing consumers with its stunning designs and easy-to-use software, Google is supplying Android for free to phone manufacturers. This dual-pronged assault on Microsoft is something I call Goopple
I was an Android skeptic
, concerned about the staying power of individual models, but the proof is in the pudding:1.
The HTC Droid Incredible just saw its expected shipping date pushed back another two weeks to July 12 by Verizon
(MOT) recently said
that the 7-month-old (!) Droid remains supply-constrained. And if people still really want the old Droid, they'll probably go gaga for Motorola's upcoming Android phones.3.
Demand for the HTC EVO 4G has been so hot that Sprint
(S) has stopped taking orders altogether.
In the first quarter of 2010, Gartner's numbers indicate that combined, the iPhone and Android platforms held a combined 25.9% market share, up from just 11.2% in the first quarter of 2009. Over the same time frame, all competing major smartphone operating systems lost share, including Microsoft, whose Windows Mobile fell to 6.8% share from 10.2%.
The Windows Mobile platform is clunky and tired relative to the iPhone and Android systems, and Microsoft won't have a serious answer until later this year with Windows Phone 7.
So now that we know the lay of the land, let's ask a question that nobody's brought up:What If WP7 Is a Huge Hit?
Microsoft is a big company so it needs to hit home runs to grow. Analysts expect the company to hit $62 billion in revenue this year, and $67 billion next year. That's a big needle to move.
In the past, Windows Mobile hasn't delivered much of a financial contribution to Microsoft. The company last reported the Mobile and Embedded Devices segment in fiscal 2006, delivering revenue of $377 million and an operating profit of $2 million -- essentially rounding errors.
Subsequently, that segment was folded into Entertainment and Devices, which is dominated by the volatile Xbox video-game business.
So while there's no real way to accurately gauge the financial impact of Windows Mobile on the company, we can assume it's small.
Let's do some math.Disclaimer
: I'm not practicing exact science here. I'm just trying to get a basic idea of what the numbers could look like. If anything, if what I'm proposing here seems particularly crazy, please let me know in the comment section below so we can all learn together.
Market-research firm iSuppli just released a forecast that the global smartphone market will grow to 506 million units in 2014 from 247 million in 2010. That gives us one starting point in analyzing a successful effort by Microsoft in the smartphone market.
This type of forecast is extremely difficult to get right, so for the sake of argument, let's say that the smartphone market falls somewhere between 400 and 600 million units in that year.
Now let's talk share. Microsoft's smartphone market share will probably bottom out this year. So I'll go with a range of 10% to 25%.
Figuring out a royalty rate for smartphones using Microsoft operating systems is much trickier, but I'll use a range between $20 and $30 as a very
rough guesstimate here. Windows PC royalties are thought to be about $65 per unit, and netbooks about half that. I'd imagine that Google's free Android giveaway could make it hard for Microsoft to get anywhere near top-dollar.
So here are the best- and worst-case scenarios laid out using these criteria:Best Case
: 600 million smartphone units, 25% market share, $30 royalty rate = $4.5 billion.Worst Case
: 400 million smartphone units, 10% market share, $20 royalty rate = $800 million.
The good news is that software-derived revenue can be extremely high margin, and both numbers could be boosted by ancillary businesses like apps and mobile search. There's also a strategic benefit to keeping customers away from the iPhone and Android ecosystems.
The bad news is that even a few billion dollars in high-margin revenue isn't all that much for a company as big as Microsoft. Microsoft is also going to have to pour a heck of a lot of money into marketing if it wants to build a multi-billion dollar business while Apple and Google are making big waves.
And remember the free-burger problem
? Competing with free really sucks, especially when the free option (Android) is showing signs of excellence.
Should Microsoft be in mobile? Yes, but the financial opportunity just isn't spectacular, even in a best-case scenario.
No positions in stocks mentioned.
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