Finally, Microsoft Is Becoming a Player in Smartphones

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Following two days of gains, stocks fell on Tuesday, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average both retreating 0.2%. One possible culprit: a report by a top Chinese investment bank that the Chinese government will reduce its GDP growth rate target for next year to 7%, down from 7.5% in recent years. China has become a key piston in the global economic engine, but a rebalancing of the Chinese economy away from investment toward consumption would ultimately be a healthy development.

Is Microsoft finally becoming a credible player in the smartphone market? That certainly seems to be one of the key takeaways from the data for third-quarter smartphone shipments released by research firm IDC today. While the smartphone market grew at a robust 40% year-on-year, the Microsoft Phone platform achieved 156% growth, thanks mainly to Nokia, which accounted for 93% of all Windows Phone-based handsets.

Sure, Microsoft Phone started from a pitiable base relative to its two main rivals, Google's Android and Apple's iOS, but it remains that its market share in the third quarter has nearly doubled to 3.6%, from 2% in the year-ago period. Meanwhile, Android hit a milestone of its own, with greater than 80% market share in the quarter. What do Microsoft Phone have going for them? Ramon Llamas, Research Manager with IDC's Mobile Phone team provides an explanation:

Android and Windows Phone continued to make significant strides in the third quarter. Despite their differences in market share, they both have one important factor behind their success: price. Both platforms have a selection of devices available at prices low enough to be affordable to the mass market, and it is the mass market that is driving the entire market forward.

Indeed, the brutal deflationary economics of this market were also on display in the quarter, with the smartphone average selling price falling 12.5% year on year to $317 -- that's not a game Apple likes to play. Let's not forget, however, that the iPhone 5c and 5s were only introduced midway through September (in a very successful launch), so their impact on the market will only be properly reflected in the current quarter.

Back in July, tech blog BGR outlined three factors that favored an increase in market share by Microsoft: first, the continued decline of BlackBerry (which has accelerated since July); second, an adoption boost for Windows 8 in 2014 once Microsoft ends support for Windows XP; and, finally, Microsoft's app developer payoff program. The first of these was key in the contributing to Microsoft's success in the third quarter, but there is no reason to think that the latter two can't add to this momentum in the quarters to come.

I was critical of Microsoft's decision to buy Nokia's handset business initially, but between a tighter integration between software and hardware development and Microsoft's resources, the deal has the potential to be a fourth catalyst for market-share gains. Microsoft has been on a roll recently -- it finally looks like a contender again; today's numbers will help confirm the massive reversal in investor sentiment the company has enjoyed.

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Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends Apple and Google and owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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