The Android–iOS Mobile Duopoly
Microsoft Has Already Lost the Mobile War
On March 27, 2014, Microsoft (NASDAQ:MSFT) finally made its Office software available to the Apple (NASDAQ:AAPL) iPad platform. Free iPad versions of the Office suite may now be downloaded in three separate Word, Excel, and PowerPoint applications. The free Office applications allow for the opening, viewing, sharing, and sorting of documents. Apple iPad users, however, must purchase an Office 365 subscription to create new documents and to execute what Microsoft has referred to as “robust editing” and “rich formatting.” For now, Office 365 Personal retails for $6.99 per month, and offers cloud computing between smartphone handsets alongside one personal computer and one tablet. Apple will take a 30 percent cut out of Microsoft Office 365 subscriptions sold through its App Store.
Office for Apple iPad may be interpreted as Microsoft’s admission of defeat within the mobile space. Office for iPad rendered the Microsoft Surface obsolete. The new strategy does parallel the passing of the torch between Steve Ballmer and new CEO SatyaNadella at Microsoft. Going forward, Microsoft may enhance shareholder value if it were to abandon recent forays into devices in order to strictly deliver software to the marketplace.
Research firm comScore (NASDAQ:SCOR) recently released its February 2014 U.S. Smartphone Subscriber Market Share report. Be advised that the report actually presented averages of data taken from the quarterly period that spanned between December 2013 and February 2014. One quick look at the comScore report would highlight the clear presence of the Google (NASDAQ:GOOG) Android-Apple (NASDAQ:AAPL) iOS duopoly above this particular market subset. According to comScore, Android (52.1 percent) and iOS (41.3 percent) systems combined to operate 93.4 percent of U.S. smartphone subscriptions through this latest quarter. Microsoft, for all of its financial heft, managed to carve out a meager 3.4 percent share of the U.S. smartphone market through this same time frame.
International Data Corporation (IDC) estimates have also painted a similar picture within the tablet market. On January 29, 2014, IDC listed the top five calendar Q4 2013 tablet vendors as Apple, Samsung (SSNLF.PK), Amazon (NASDAQ:AMZN), Asus, Lenovo (HKG:LNVGY), and Others. Market leading Apple reported a record 26 million in iPad tablet unit sales during the holiday quarter. Alternatively, Microsoft failed in best fifth place to Lenovo, which shipped 3.4 million tablet units for Q4 2013. Steve Kovach and Business Insider estimated that Microsoft sold a mere 830,000 Surface tablets during the 2013 holiday season. According to Kovach, Microsoft Surface tablet revenue “tanked.”
Microsoft has included its popular Xbox gaming console alongside the Surface tablet within its Devices and Consumer Hardware operating segment. Alternatively, Windows Phone sales have been made a part of the Devices and Consumer Licensing division that is also above Office software sales. The relatively new operating segments have made for somewhat difficult comparisons of Microsoft mobile unit sales across time. In any event, Devices and Consumer Hardware generated a mere $258 million in gross margins off $2 billion in Q3 2014 operating segment revenue. Last year, Microsoft Devices and Consumer Hardware accounted for $393 million in gross margins.
The Bottom Line
At its core, Microsoft is still a software company that dominates the personal computer and enterprise market. Commercial Licensing generated $9.4 billion in gross margins off $10.3 billion in segment revenue through this latest quarter. In all, Microsoft closed out Q3 2014 having banked $14.5 billion gross margins off $20.4 billion in revenue. Again, Microsoft would unlock shareholder value if it were to shut down, or even spinoff, its mobile hardware enterprises. Microsoft would be better positioned to leverage mobile market growth through software licensing sales only. Without a major change in strategy, prospective investors can simply expect Microsoft to track the S&P 500 Index, while returning larger amounts of capital back to shareholders through dividends and buybacks.
At worst, Microsoft will continue to throw good money after bad in mobile hardware. Last year, Microsoft took an embarrassing $900 million charge related to Surface RT inventory write-downs. The Surface tablet and Windows phone movement is comparable to the “Jack of all trades, Master of none,” cliché. Microsoft and its shareholders have already discovered that this scatterbrained approach never carries over well to the world of big business.