Analyst: With just 1.3% share in U.S., Microsoft may need to abandon smartphones

Microsoft (NASDAQ: MSFT) may need to abandon being in the devices market altogether and focus more on services, according to industry analyst Chetan Sharma. Microsoft's Windows Phone platform continues to struggle for market share globally, and though it has gained traction in some markets in Europe, Sharma wrote in a recent research report that Microsoft may need to cuts its losses given the lack of return on investment it has made in mobile.

In his review of the wireless industry in the second quarter, Sharma zeroed-in on Microsoft's devices strategy. Microsoft has announced plans to cut 18,000 jobs, including 12,500 former Nokia workers, the largest restructuring in the company's history. The software giant has also indicated it will focus more on Lumia-branded smartphones and growing the overall Windows Phone ecosystem than on feature phones, which it reportedly will discontinue selling.

"Google (NASDAQ: GOOG) was tempted by the lure of the device business and to some extent was forced to buy Motorola," Sharma noted. "It took 10 quarters to realize that the device business is a different beast, that there was a DNA mismatch, but the exercise did provide some key business insights to the management team. Google shed the device business and kept its partners happy."

Sharma said Microsoft's acquisition of Nokia is following a similar pattern. He said that after Nokia threatened to adopt Android, Microsoft "had no choice but to acquire the beleaguered company that has been just devastated since it picked up Windows as its primary OS."

"It was clearly a mistake both by Nokia first and Microsoft after that," he added. Sharma noted that Microsoft CEO Satya Nadella "to his credit" decided to "shed a good part of the business in a mere three quarters (a clear admission of a mistake). While the impending decimation of the once vaunted Finnish brand was very obvious, the bigger question in front of Microsoft is 'What to do with Nokia that's remaining?' The current plan is to continue churning out the Lumia devices at different price points and see what happens."

Sharma said that Windows Phone garnered just 1.3 percent of the U.S. smartphone market in the second quarter, and that globally it had 2.7 percent. That last figure is in line with estimates from research firm Strategy Analytics.

"Granted that in some countries, Windows is starting to approach double digit market share, even Microsoft admits its mobile strategy is in shambles," Sharma wrote. "After being in the U.S. market for more than two years with billions spent in marketing and distribution, 1.3% share is nothing to write home about. Microsoft can get better traction in markets where new-subs are entering the ecosystem vs. replacement markets like the U.S. However, what market is telling us is that despite the blood, sweat and tears that have been spent over the past few quarters, there is little appetite or need for another platform."

Sharma said Microsoft remains strong in the enterprise and in the cloud markets but he said the computing market is now very different from what it used to be.

As a platform, Sharma noted that Windows Phone is "very well designed and the devices coming out a quite good. However, the current data indicates that unless something changes drastically, Windows Phones might be on the verge of being 'Zuned out' of the market. And just like Zune, the fault will lie not in the product or the distribution or the marketing but rather in the timing of the market entry. Microsoft might be better off giving up on its device dream and just focus on services on top of the platforms that dominate. It might be time for hermit crab strategy."

For more:
- see this Chetan Sharma post

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