Two years ago, Microsoft (MSFT) had several OEM partners for its Windows 10 Mobile OS platform. They all gave up making Windows 10 Mobile phones because Microsoft itself was competing against them by selling sub-$100 Lumia phones. In the end, Microsoft also quit making entry-level and high-end Lumia Windows 10 Mobile phones. It wrote off the $7.6 billion purchase of Nokia’s (NOK) phone hardware business. There also was the cost of giving severance packages to laid-off phone hardware-related employees.
Further, Microsoft already officially ended support for Windows Phone 8. It is, therefore, no surprise that Microsoft didn’t mention any mobile references in its latest 10-K filing. Microsoft will likely still offer support to Windows 10 Mobile phone users but, like BlackBerry (BBRY) 10 OS, it is a walking dead. Qualcomm (QCOM) shareholders should not expect Microsoft to order Snapdragon processors for future Lumia or Surface smartphones. In spite of his interview last May, I don’t believe Nadella is ever going to unveil a new smartphone during his reign as CEO at Microsoft.
(Source: Microsoft/Motek Moyen)
Nadella’s work history did not show he excelled in hardware products. He has always been a software products man – he knows when a software product is a flop or not. The Windows 10 Mobile OS is just another failed software product like Windows RT, Windows Phone, Windows Vista, and Windows Me. I opine that Nadella is only keeping Windows 10 Mobile on life support because of commitments to OEMs like HP Inc. (HPQ) and Acer who made handsets for it.
Windows 10: Zero Chance of Recovery
Nadella has not officially declared Windows 10 Mobile as deceased, but there are no more vital signs out of it. As of May 2017, Windows only has 0.1% OS share in smartphones. IDC previously predicted in 2012 that Windows will have a 19.2% share in smartphones by 2016. We know what happened. Microsoft ended 2016 with 0.2%!
Microsoft tried but its best was never good enough. In spite of the free Android/iOS app conversion tools, the majority of mobile app developers ignored the Windows 10 Mobile OS and the Universal Windows Platform. Microsoft even tried to lure app developers with cash incentives to make new apps for Windows. The chart above is prima facie evidence that Microsoft failed miserably when it comes to attracting third-party industry support.
AI-First, Not Mobile-First
Microsoft’s new top priority is Artificial Intelligence. It failed to compete with Google’s (GOOG) (NASDAQ:GOOGL) Android OS on mobile. Microsoft now wants to try competing in Artificial Intelligence. Unlike the smartphone ecosystem, Microsoft still has a fighting chance to make it big in Artificial Intelligence. Second only to Google, Microsoft made many corporate AI-related acquisitions. Cortana is tested the second-smartest digital smartest assistant.
Below is a screenshot from Microsoft’s latest 10-K filing. Microsoft wants to leverage Artificial Intelligence to pollinate the digital lives of people. This mission will span multiple devices. Microsoft gave up on making its own Windows mobile ecosystem in favor of a pure platform-agnostic approach. Intelligent cloud offerings like Azure and Cortana will still disseminate the for-profit influence of Microsoft on devices/computers that don’t run on Windows operating systems.
The new AI-First, Cloud-First focus of Microsoft is commendable. Tractica’s 2016-2025 forecast says Artificial Intelligence applications will eventually generate $59.8 billion by 2025. AI could probably help Microsoft recover the losses/write-offs it had to suffer after it bought Nokia’s Lumia phone hardware business.
The healthy revenue streams from its Intelligent Cloud and Productivity and Business Processes segments are sufficient growth drivers for Microsoft. Microsoft doesn’t need to sell Windows 10 Mobile smartphones or ARM-based Cellular PCs. Letting Windows 10 Mobile OS quietly die is not going to adversely affect Microsoft’s top line or bottom line.
I rate MSFT as a buy.
Disclosure: I am/we are long MSFT, GOOG, NOK, BBRY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.