Microsoft’s Two Big Announcements and Their Future Impact

Microsoft made a number of announcements at their Build conference this morning. While many were related to Windows 8.1 and Windows Phone 8.1, most feature announcements were simply playing catch up. But they did announce a few things I think are interesting.

Let me preface this by saying Microsoft is in a deep deep hole. Nothing they announced or will announce any time soon will immediately get them out of it. What I am looking for are things I can point to that signal they are building a step, or a ladder, to get out of this hole.

The first and most important announcement is they are not charging any OEM making a tablet or smartphone less than 9 inches a fee for Windows Phone or Windows 8.1. The big one here is Windows Phone is now free to OEMs. Again, this announcement will not immediately get them out of this hole but several observations need to be made about it.

First, this move is geared at hoping to win over OEMs who are making smartphones for the low end of the market. This is the part of the market where the vast majority of growth will be over the next 2-3 years. My numbers tell the story that, over the course of the next 2-3 years, the market will add a billion new smartphone owners. Over 80% of these new users will purchase their first smartphone at a price point less than $150 and largely less than $100. In making Windows Phone 8.1 free, Microsoft is hoping to get a slice of the next billion smartphone owners who will be connecting to the Internet for the first time. Microsoft played a key role in connecting the first billion users via a PC, and are hoping to play a key role connecting the next billion via a smartphone.

Note this picture showing the growing ecosystem and the regions where each OEM is strong. Most of the OEMs that you may not recognize are serving the low end of the market in their respective regions.

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The second observation, which is important to the first, is most of the vendors in this screenshot are paying Microsoft a licensee fee for their Android implementation. Which means for many of these OEMs, shipping a Windows Phone will cost them less than shipping an Android phone. The problem for Microsoft is if they can not monetize a shift in the mix of Android phones sold by these OEMs, then they are losing money by not monetizing the OS. For this to work, Microsoft must have services they can make money on, to the tune of $5-12 per year per device for this to make them as much money as they make on Android per device. A key point to this observation, however, is Windows Phone requires quite a bit of processing power. An OEM likely can’t ship a phone costing less than $100 dollars, given the tech specs necessary, that runs Windows Phone. For this strategy to even be remotely possible for Microsoft, they need Windows Phone to require less resources so it can ship on a lower cost device specification wise. Windows Phone hardware, and even the software, is now truly just a shell to Microsoft services — very similar to Google in this regard. To work, Microsoft needs services these new customers value and will use.

The second announcement is a bit more nuanced but could have interesting implications. Microsoft announced their own smart voice assistant on Windows Phone called Cortana. This is the name of the cloud computer based personal assistant for the Master Chief character in Microsoft’s popular Halo gaming franchise. While most of the things this solution enables are just catching up to Siri and Google Now, this service is fully powered by Bing. When I look at many of the services Microsoft is offering, Bing is the one I believe they have the best chance at monetizing with these new low end customers — assuming they win their allegiance.

I do believe the next big evolution of the smartphone is to transition the device from what it is today and move toward a true personal assistant to its owner. Artificial intelligence will play a key role in this. While this is not necessarily something a first time owner needs or wants, it is an important foundation for Microsoft to build upon.

As I stated earlier, none of this immediately gets Microsoft out of this hole. While neither announcement is a guarantee they are building toward a ladder, these are at least a couple of the things I think make the case they are moving in that direction.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

4 thoughts on “Microsoft’s Two Big Announcements and Their Future Impact”

  1. I was impressed with today’s BUILD keynote. MS has all the pieces coming together to take a lead over Apple and pose a serious challenge to Google. Kudos to them.

    1. Bing as a service (especially now with Cortana, a voice front end) has really come into its own. Now I just wish OneDrive desktop integration didn’t suck so badly.

    1. Contrary to popular belief, the only patent Android makers are paying Microsoft for is the vFAT with LFN support. Maybe they’re not using that…

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