Could this gamble be game changer in 2015?

IDC released 2014Q3 report on smartphone OS market. It shows Microsoft Windows firmly in the 3rd place in 2014.

People may have forgotten how and from where it rose to this position, but future business historians will remember this as another successful strategy maneuver from Microsoft.

Techcrunch in a recent article observed that Microsoft went public in March, 1986, barely 5 months after it released Windows OS [Nov, 1985].

In the S-1, Mircosoft's IPO document, Microsoft's future valuation of Windows software is fascinating!

"In November 1985, Microsoft began shipping Microsoft Windows, a graphical operating environment which runs on the Microsoft MS-DOS operating system. As an extension of MS-DOS, Microsoft Windows manages such hardware as the keyboard, screen, and printer. This product allows new applications programs to present themselves in a standard and graphical manner that is independent of video or other output devices. Microsoft is encouraging independent software developers to create applications programs which will take advantage of Microsoft Windows graphical user interface features. Lotus Development recently announced its intent to pursue the development of applications products that will run on Windows. Microsoft’s own new applications software will be based on Microsoft Windows. It is too early in the life of Microsoft Windows to determine what level of acceptance it will attain in the marketplace."

Well one hardly needs anything to be said further to that statement today. Windows not only redefined PC market, Microsoft ensured that Windows' success is leveraged across all emerging computing platform markets, Server, Gaming Console and so on. Before Apple's second wave of growth, people never saw any serious threat to Windows for any foreseeable future.

Unfortunately, Windows never was a serious choice in embedded OS market. Microsoft also appeared to be hesitant, if not reluctant, player in smaller platform segment. Partly to that, all ventures [windows CE for example] from Microsoft in mobile segment were seen as weak, if not tentative. Mobile Phone market was largely proprietary and with Nokia leading the pack, no one saw any incentive to break the status quo.  That hesitation turned into a strategy blind-spot soon when Apple turned the table with iPhone. Microsoft needed something very badly to cover the lost space. For quite some time, beside Apple, there was no serious dominating player in the smartphone market.

Then Google brought Android and Samsung brought Android-based Galaxy series of phones. Android started changing the smartphone market in the same way Linux did to the PC market earlier. Microsoft did not appear to have any play. Some people even started writing eulogy for Microsoft.

Obvious reasons were

1. Linux is eating into Microsoft's PC OS market share.
2. VMware started almost monopolizing the server virtualization market
3. Cloud was fast becoming credible alternative to private data centre for the  enterprises.
4. iPhone and iPad redefined smartphone and tablet market and Microsoft's mobile OS had no play at all.

With slow PC/Laptop growth and exponential smartphone growth, Microsoft needed a serious game changer in the smartphone segment. When no one thought of any future for Microsoft, Microsoft almost created coup-d'etat with Nokia. Fast devaluation of Nokia's valuation and Elop's crucial decision of adopting windows for Nokia phone gave Windows the life-saving chance that it needed so badly.

IDC's recent report seem to indicate that the strategy maneuver has worked for Microsoft. Gartner's press release also indicate the same trend. Microsoft is back to OS game. Below charts from Gartner speak for themselves:

Table1
Worldwide Device Shipments by Operating System in Mature Markets (Thousands of Units)

Operating System	2013	2014	2015
Android	266,701	313,529	337,791
IOS/Mac OS	157,273	167,787	182,564
Windows	138,312	141,977	149,128
Others	100,633	48,130	29,352
Total	662,920	671,424	698,835

Shipments include mobile phones, ultramobiles (including tablets) and PCs

Source: Gartner (October 2014) 

Table 2
Worldwide Device Shipments by Operating System in Emerging Markets (Thousands of Units)

Operating System	2013	2014	2015
Android	632,517	928,135	1,117,860
Windows	187,474	194,091	221,804
IOS/Mac OS	78,928	95,304	112,647
Others	772,562	520,605	383,914
Total	1,671,480	1,738,135	1,836,225

Shipments include mobile phones, ultramobiles (including tablets) and PCs

Source: Gartner (October 2014)

Cost for the gamble

Leaving the development cost of windows 8, let's just look at the cost Microsoft incurred in acquiring Nokia phones:

Microsoft paid to Nokia: $7.2 billion

Adoption cost: $1 billion out of the Nokia operation

Microsoft posted an operating loss of $692 million this July. It claims to stop losses by June, 2016. 

How do the Microsoft shareholders look at this? This Business Today report says, Microsoft shares hit new 14-year highs just after quarterly result announcement, and were up by 1.1 per cent at $45.33.

Microsoft is charting new territory

Microsoft recently launched Lumia 535. They dropped Nokia logo in the new phone. Not sure how many are observant that Microsoft is charting a new path here.  More than 91% of Windows mobile phone sales bring revenue directly to Microsoft. In a recent report, IDC projects that Windows Phone will account for $7.8 billion (about 2%) of the $382.9 billion in revenue expected to be generated by the smartphone market in 2014. Although windows share in smartphone market is not high, the fact that almost all windows phone sales happen from Microsoft now, this gamble has already created success for Microsoft. Here Microsoft is charting Apple path [hardware + software] unlike what they did in 1985. Although Microsoft has treaded complete hardware and software path before with Xbox, smartphone market is likely to pose a lot harder challenge since there are too many dominant players and market is too nuanced already. But if there is anything to cheer about, it is that Windows has moved from PC-only market to PC plus Tablet plus smartphone market.