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Microsoft Transforms Business Model for Windows Phone

10 April 2014

Microsoft abandoning license fees is a significant step away from the heritage of the company which was built on the strength of its Windows licenses. In many ways though this move was inevitable and will not actually make significant difference in the smartphone market.

Unfortunately for Microsoft, every smartphone manufacturer in the world bar Apple, Nokia and Blackberry use Android as their primary smartphone platform. While the license fee may no longer be there, there are many other costs involved in producing a smartphone with a specific OS such as integration, customisation and testing. Given that manufacturers already have these processes working for Android and no-one has had major success with Windows Phone yet, there is little reason to believe that simply eliminating the license fee will be the factor that transforms Windows Phone fortunes in the market.

Revenue

Even more important for Microsoft is its ability to generate revenue and profit from its new devices and services strategy. Nokia's handset business has reported one quarter of operating profit in the last eight, losing nearly €1.5bn in that period. Only Samsung and Apple are able to record consistent profit for mobile hardware at the moment. As Windows Phone is having most of its success at lower price points this situation is unlikely to improve much. This has a knock on effect on the services part of the strategy too as Microsoft is unlikely to generate significant service revenue for OneDrive, Xbox Music etc. from consumers who can only afford a Lumia 630. This is the key difference in Google and Microsoft's free mobile OS strategies—Google earns its money mainly off advertisers and so can benefit from having large numbers of eyeballs; Microsoft still needs to sell premium services to consumers.

Broader issues affect Windows Phone's appeal in the market

While the Windows Phone app ecosystem has improved and now features almost all key apps, it still lags far behind iOS and Android when it comes to updating these apps to the most current versions. Often the Windows Phone version lacks features present on the Android and iOS apps such as the Connect feature on Spotify. This is likely to cause existing Windows Phone users to change to iOS or Android for their next device. It also means consumers converting from Android or iOS could be immediately missing some important functionality and cause high returns.

Despite the 8.1 update, Windows Phone still lags behind iOS and Android in development. While the gap is narrowing and the improvements currently being made have only a marginal impact on user experience. Nonetheless while Microsoft has played catch-up with notification centres and personal assistants, it has fallen behind again to 64-bit mobile computing and wearables. Nokia has been making excellent Windows Phone hardware for the past couple years which has enabled Windows Phone to make some inroads in the market place, but it needs much more investment from Microsoft to break through and be a true competitor to the iOS-Android duopoly.

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