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Microsoft's Lost Year on Windows Phone

A year ago at this time, Microsoft's prospects in the smartphone market seemed, if not sunny, at least somewhat bright.

Windows Phone had overtaken BlackBerry for a solid but very distant third place in the market. What's more, Windows Phone was on a tear, having shipped 91 percent more units in 2013 than 2012.

Fast forward to today, and Microsoft has retained that third-place position. But that's the end of the good news for Redmond. Rather than continuing to punch above its weight at Google's Android platform and Apple, Windows Phone actually lost share through 2014.

According to a forecast released this week by IDC, Windows Phone will wind up 2014 with 35 million units shipped for a market share of 2.7 percent. If that forecast comes true (and IDC has steadily downgraded its Windows Phone shipment forecasts throughout the year), that will only be a 6 percent increase in shipments over 2013.

That's not good enough when Microsoft needs to have several years of near-triple-digit growth to be in the conversation with Apple, let alone Android. For comparison, IDC's Android forecast now calls for 33 percent shipment growth in 2014 to more than 1 billion units. That's billion, with a "b." Apple iPhone shipments are projected to reach 178 million, a growth rate of 16 percent. So the big two are growing at double-digit rates, and the little No. 3 is growing in the single digits. For consolation, Microsoft can look to BlackBerry, which went double-digit negative.

What happened to Microsoft in 2014? If we were talking sports, we could charitably call this a rebuilding year for Team Redmond.

The first part of the rebuilding was literally rebuilding Microsoft by integrating the Nokia devices and services unit that Microsoft agreed in September 2013 to acquire for $7.2 billion. The acquisition process dragged on for longer than Microsoft anticipated -- past the projected first quarter 2014 close and well into April. Next followed a massive wave of layoffs, heavily concentrated in the incoming Nokia unit. Credit that disruption for the lack of any really high-profile handsets out of Microsoft/Nokia this year, even as new Android devices and the iPhone 6 and iPhone 6 Plus made major splashes.

With Microsoft assuming ownership of the partner that had accounted for over 90 percent of Windows Phone sales, another rebuilding aspect of 2014 was the move to rebuild the channel. Microsoft, surprisingly, made headway with a number of device manufacturers, especially for low-priced devices in emerging markets. Some of those deals have fallen through, and others have seemed slow to develop.

A third major rebuild was the retooling of the platform. Although Microsoft only gave its latest release a dot-one numbering, Windows Phone 8.1 was a major release, with the notable additions of the Cortana digital assistant, the innovative swipe-typing feature, a calendar overhaul and a significant evolution of the start screen interface. That upgrade has rolled slowly out through carriers over the course of the year.

The other rebuild is in the executive suite, with Satya Nadella taking over as CEO from Steve Ballmer in the midst of the acquisition. Whether Nadella shares Ballmer's commitment to creating a third platform in smartphones is an open question.

I asked Ramon Llamas, one of the IDC analysts responsible for putting together the forecast, which factors played the biggest role in Microsoft's stagnant year. Llamas pointed to the acquisition and the slow partnerships.

"It's the Microsoft acquisition and the rationalization of that. I think behind the scenes there's a lot more going on than you and I are privy to. There have been fits and starts, like Nokia coming out with the Android-based smartphone. I'm not sure if these were managed in the way that both Microsoft and Nokia wanted," he said in a telephone interview.

Even with that acquisitional churn, Llamas said Microsoft has succeeded in going after the entry-level market and has seen its volumes increase in that segment every quarter. On the higher end, though, "there are some gaps over there that Microsoft left open," he said.

Meanwhile, Microsoft is still in a difficult balancing act with Android-heavy partner HTC and the new group of partners has been slow to develop actual devices. "We still haven't seen much of the fruit of those relationships. A lot of us had expected it's going to come, it's going to come," Llamas said.

From IDC's perch, there's not a question about Nadella's commitment to Windows Phone. "When CEO Nadella says, 'We are cloud-first, mobile-first company,' that's probably one first too many, but they're serious about being mobile," Llamas said. As evidence, he pointed to the way the Microsoft Band is optimized for use with a Windows Phone.

Officially, IDC expects Microsoft to up its game in smartphones over the next few years. "We're going to see better rationalization between Microsoft, Windows Phone and the smartphone business," Llamas said. For now, IDC is calling for Microsoft to jump to 5.6 percent market share in 2018.

Based on Microsoft's statements to investors at the time the Nokia acquisition was announced, however, there's no way to look at 2014 as anything other than a failure. Microsoft officials said the break-even point was 50 million phones a year, which looks further away this year than it did last year. They also expected to achieve a 15 percent share of the market by 2018, which now is almost triple what IDC expects them to reach.

According to industry analysts, 2014 may have been one of the last big growth years as the smartphone market approaches saturation. For Microsoft, 2014 was a lost year.

Posted by Scott Bekker on December 03, 2014 at 9:59 AM