The most popular smartphones at this year's Consumer Electronics Show in Las Vegas didn't run Google's (NAS: GOOG) Android or Apple's (NAS: AAPL) iOS. Instead, former titans Microsoft (NAS: MSFT) and Nokia (NYS: NOK) stole the show with a new phone and OS, after watching their two biggest rivals eat their lunch for the past five years. But while Microsoft doesn't need a short-term win as desperately as Nokia does, victory or defeat here could have big repercussions on Mr. Softy's long-term fortunes.
How the mighty have fallen
In 2007, Microsoft's Windows Mobile platform controlled a whopping 42% of the smartphone market, according to statistics from NPD. But for the nine months ended October 2011, Microsoft's old Windows Mobile and its new Windows Phone 7 together represented just 5% of all smartphone sales.
Blame Apple and Android. Shortly after the first iPhone shook up the smartphone market in 2007, Google followed with Android, a free OS that flourished on handsets from a multiple manufacturers. As of December 2011, Android represented more than half of U.S. smartphone sales, according to NPD. Apple commanded 29% of sales -- and two-thirds of all profits in the entire mobile-phone business.
Back in contention
To get back in the smartphone game, Microsoft teamed up with Nokia in February 2011. The folks in Redmond reportedly paid Nokia $1 billion or more to exclusively support Windows Phone. The first fruits of that deal will soon hit the U.S. -- and initial reports say they're pretty darn sweet.
Microsoft's critically praised Windows Phone 7.5, nicknamed "Mango," sports a fresh, innovative interface that reportedly looks and feels nothing like iOS or Android. And while Android's flexibility has spawned a mishmash of different versions and interfaces, Mango promises to work the same no matter what phone it's running on.
And while the first handsets to run Windows Phone apparently lacked power, Microsoft's made sure that Mango gets showcased on first-rate hardware. HTC's Titan II and Nokia's Lumia 900, both Windows Phones, were the talk of this year's CES, earning rave reviews from tech pundits. With Nokia's help, Microsoft has reportedly prepared a $200 million marketing push to get Windows Phones in as many hands as possible. One Morgan Stanley analyst expects Nokia alone to ship more than 100 million Windows Phones over the next two years.
Let's play "hide the sales figures!"
Unfortunately for Microsoft, it'll need to sell a lot more phones than that to settle for anything other than third place. In its fiscal 2011, Apple sold 72 million iPhones -- more than it previously sold from 2007 through 2010 combined. And while full-year data isn't yet available, 143.5 million Android phones were sold in just the first three quarters of 2011, according to Gartner.
Unless Windows Phone sales absolutely skyrocket, don't expect them to move the needle for Microsoft or its stock. The mobile OS currently represents a drop in Microsoft's overall revenue bucket; the company bundles its sales figures with revenue from its popular Xbox console and other devices. Last July, the Seattle Post-Intelligencer estimated that Microsoft made no more than $613 million in fiscal 2011 Windows Phone revenue -- roughly 7% of its division's total sales.
Using the same method, I calculated no more than $220 million in Windows Phone revenue for Q3 2011 -- 11.2% of the division's overall revenue. That could suggest growing sales for Windows Phone, but the same revenue pool also includes the patent fees Microsoft's been collecting on Android phones from manufacturers including LG, HTC, and Samsung.
Given Android's rapid growth, Microsoft could profit nicely from smartphones even if Windows Phone flops. However, Windows' enormous share of the PC market is slowly but surely dwindling. Overall PC sales have begun to fall, down from 93.5 million units in Q4 2010 to 92.2 million in Q4 2011, as more consumers turn to phones and tablets. The only PC maker still growing? Microsoft's arch-foe Apple, which posted 20% growth in Q4 2011, even as all its biggest rivals saw sales drop.
With its desktop and laptop stronghold under siege, Microsoft would doubtless prefer not to settle for a mere slice of its competitors' sales.
Can this dynamic duo succeed?
Buzz and acclaim at CES don't always translate into success. The Motorola Xoom, which won CES's Best of Show last year, subsequently got trampled into obscurity by the iPad. Android's already working to standardize its interface, which could blunt one of Mango's big selling points.
In addition, there may be more riding on Mango than first meets the eye. Microsoft's using its interface as the template for Metro, the new look and feel it'll unveil across both desktop and tablet computers in its forthcoming Windows 8.
With its shares down only around 9% in the past five years, Microsoft doesn't need an immediate hit as badly as Nokia. But Android has a massive and ever-growing lead, and Apple's iPhones enjoy the kind of profits and pricing power its rivals can only dream about. Redmond's likely hoping that Nokia and HTC's phones help showcase its own platform, and create user demand that will spur other manufacturers to make more Windows Phones, too.
Windows represented 28% of Microsoft's total sales in Q3 2011, and more than 45% of its operating income. If Microsoft's mighty OS can't make the leap from today's desktops to tomorrow's phones and tablets, the company could kiss most or all of those riches goodbye in the long run -- and risk falling even further into mobile irrelevance.
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At the time thisarticle was published The Motley Fool owns shares of Google, Apple, and Microsoft.Motley Fool newsletter serviceshave recommended buying shares of Apple, Microsoft, and Google, and creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter servicesfree for 30 days.FoolNathan Aldermanholds no financial position in any of the companies mentioned above, and he likes his mango with fresh strawberries, tossed with honey and lime juice. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool'sdisclosure policythinks the Amiga is due for a comeback any day now.
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