The Chicken-and-Egg Apps Dilemma
There have been many media articles that have suggested that if
only Microsoft (
) could fix the apps problem, it would sell many more Windows
phones. I agree with this sentiment - in fact, solving this problem
would remove the single, largest barrier to success for Windows
Phone. But getting developers to build apps for Windows Phone at or
near the same time that they roll out for Android and iOS is, of
course, a most difficult problem for Microsoft to solve.
) and Google (
) share an early-movers' advantage in the mobile handset market
that will not easily be overcome. Developers remain reluctant to
develop apps for platforms that have modest market share - it just
is not worth their time. Consequently, newOSs have a hard time
gaining market share without a rich apps environment.
Consider the plight of Windows Phone which is not only missing
the breadth of apps of iOS and Android, but is also still missing
these three high profile apps today:
While third-party apps are available on Windows Phone to deal
with these missing apps (for example, a third-party app called
integrates well with Instagram on Windows Phone), they are viewed
as inadequate by many users. Some fret that the latest features
will not be available as soon on the copycat as the original or
that the third-party may go out of business or be forced to pull
the app for copyright violations or other reasons. Even when
alternative apps are available that are superior to the popular
ones, there remains a huge marketing issue for Windows Phone as
long as the more popular app remains absent.
But even if the three key missing apps listed above were made
available to Windows Phone tomorrow, that would not solve the
longer-term issue for this fledgling OS. As new apps are inevitably
developed, their availability on Windows Phone will continue to lag
- often by several months. Consider that DropBox and Candy Crush
were only added to Windows Phone long after their debut on the
Recently, Microsoft has put into place
to get the developers to build apps for Windows Phone more quickly.
While this may help close the gap for smaller apps, it is unlikely
to compel a company the size of Facebook (
) (Instagram's owner) into porting its popular apps to Windows
There is, I believe, only one long-term solution to this app gap
- Windows Phone must increase its market share. I believe that
market share in the 10%-15% range should be the tipping point to
force developers to take notice and no longer ignore the
World Larger Than Just the US, but US Market Still
The US market appears to be more app-focused than most others.
This may be one reason why Microsoft is having a more difficult
time gaining market share here versus Europe.
On the recent quarterly conference call, Nokia's (
) CEO Steven Elop was asked how much longer he was going to keep
trying to improve market share in the US given that Nokia has sold
approximately 500K handsets here for each of the last 8 quarters
despite introducing several new innovative products over this
period. He answered succinctly with the following points that I am
- The introduction of high end technology in the US sets the
stage for media coverage from both traditional media sources as
well as the blogosphere. (He mentioned the newest camera
technology in the Lumia 1020 as an example.)
- The deployment of new handsets with the US operators provides
the company with critical intelligence for their introduction in
- The introduction here provides a high profile which
encourages developers to build apps.
In summary, he said that the US market "... has high signaling
Now consider the awkward and uncomfortable position Nokia finds
itself in the United States at the start of the third quarter:
HSN recently began selling the Lumia 521 for $99 including
several accessories. Meanwhile, just hours into the start of the
pre-ordering process for the soon-to-be-released Lumia 1020,
AT&T is already reporting sell-outs.
This means that Nokia is effectively selling its mid-tier Lumia
521 near cost (one Wall Street analyst note suggests a BOM of $100
for the 521) to generate volume and improve its US market share. At
the same time, Nokia cannot meet demand for its higher margin Lumia
1020 even though demand is clearly present. How did it get itself
into a knot like this?
Generals Always Prepare for the Last War
Only hours after the start of pre-orders of the new Lumia 1020
at AT&T a few days ago, their website displayed the
all-too-familiar SOLD OUT status. Those of us who follow Nokia
closely have become all too familiar with this trend as each new
Lumia model gets introduced. While these early sell-outs do create
some excitement on the Internet, it has become all too clear (given
the pattern), that these shortages are much more due to a lack of
supply rather than an excess in demand. To take an extreme case,
the Lumia 920 did not roll out in certain European countries for
nearly 9 months after its initial introduction in other
I still do not know what fraction of these shortages is due to
component procurement issues versus working capital constraints
(i.e. Nokia's cash crunch) versus an active strategy by management
to avoid obsolete inventory. But I suspect most of it is due to the
This is for two reasons: First, management has hinted to this on
previous press releases. Second, Nokia has recently felt the pain
of such obsolete inventory.
After the initial release of the Windows 7 phones, Nokia
eventually found itself with large amounts of unsold inventory.
(Some of this issue was exacerbated by the revelation that Windows
8 phone would be incompatible with the previous generation.) Thus,
Nokia was forced to unload this inventory at a deep discount. As an
aside, a lot of this inventory was sold in Italy which may explain
why that country's Windows phone market share spiked
disproportionately to the rest of Europe.
I think to avoid this inventory issue, Nokia has been purposely
limiting its initial build rates. Only after a handset has
established demand has management been willing to commit capital
(i.e. Lumia 520/521). But this has had the adverse effect of
causing severe shortages when introducing new models. No doubt they
have left some money on the table as many consumers have likely
chosen to buy a different handset rather than wait for the Nokia
handset to arrive in the mail weeks hence.
Subsidize Ultra-Low-End Windows Phones to Drive Market
As far as I know, the exact licensing terms for developing a
Windows Phone have never been made public. But
place the cost around $23-$35 per handset. While such a fee may be
tolerable on a high end handset such as the Lumia 92X or 1020, no
manufacturer of a sub-$100 handset could afford such a fee.
But if Microsoft would consider deeply discounting (or even
giving away) its licensing fees for ultra-low-cost handsets which
currently constitute the feature phone portion of the handset
market, it could not only accelerate the worldwide move from
feature phones to smartphones but also gather up much of this
transitional market share.
Say Microsoft agreed to charge 5% of the handset average selling
price as its Windows Phone licensing fee. A $60 handset would
therefore yield a $3 fee to Microsoft - probably a tolerable cost
to the manufacturer for not having to develop and maintain its own
OS software. Regardless, I am not arguing what the exact percentage
of the fee should be (5% versus 10% or whatever), only that
Microsoft needs to provide a deep discount - enough to entice
developers such as Nokia into building on a single platform
for all mobile handsets
Consider what would happen if Nokia could transition from its
Asha and other feature phone platforms to a single, unified Window
- Nokia would have to pay slightly more in fees to Microsoft
but could avoid some development costs on these phones - no more
development dollars on Asha.
- Microsoft would increase its licensing fees slightly. While
the overall dollars may be low (per handset), the contribution
margin should still be reasonable.
- As low-end Windows Phone users transition to mid-tier
products, they would already be familiar with the Windows
platform, thus making them less likely to switch to Android. (iOS
is not really a possibility for this market segment unless Apple
intros a lower end handset).
More importantly, such a move would drive volume in a portion of
the market that would otherwise be inaccessible to them anyway.
Volume All at Low End of Handset Market
Nokia recently introduced its new flagship, the Lumia 1020 with
a revolutionary 41 MP camera. One might think that the Lumia 1020
would, therefore, be the most popularly searched Lumia on the
Internet recently. But
this Google Trends chart
shows it is not the case.
Conclusion: To Compete Effectively at the Mid- and
High-Tier, Microsoft Must be Prepared to Subsidize at the Low
What I am suggesting in this article is a strategy for Microsoft
to pursue to enhance its market share in Windows Phone. In that
sense, Nokia will have little say in the matter. But without such a
move, I believe both companies will continue to find the going
tough in the competitive world of mobile. So far, the partnership
has tried conventional means to increase market share. While this
has had some modest success outside the US market, they have not
been able to make a significant dent here. By following traditional
marketing techniques, they have tried to work on the numerator to
the problem. But by lowering the licensing fees on the low end,
Microsoft can, instead, work on the denominator to the problem by
increasing the size of the smartphone market - thereby attracting
more app developers by increasing their market share. Given Nokia's
strong brand in the low end of the handset market, such a strategy
seems a good fit for this partnership.
I am long [[NOK]]. I wrote this article myself, and it expresses my
own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
Private Equity Investment In AV Homes Could Power