Chinese whispers on Microsoft’s next move

The rumour mill has been going into overdrive with the suggestion that Microsoft will be releasing a phone to grab a large share of the fast-growing Chinese smartphone market, before bringing it to western audiences at some point in the future. The latest murmurs are that the company has already begun working with component suppliers to test its smartphone design.

The suggestion that Microsoft may attempt to create its own smartphone originally surfaced back when the company announced its Windows Phone operating system (OS) in partnership with Nokia. It also emerged that officials at Microsoft’s parts supplier in Asia confirmed testing has already begun on Microsoft’s own smartphone device.

Rumours have been strengthened by the release of the Microsoft Surface tablet, which utilises a touchscreen, and the Windows 8 RT OS, designed to run on mobile devices. Most of the ingredients needed for a smartphone are in place. It’s understandable that Microsoft would want to monopolise on the demand for smartphones in Asia; China is the largest smartphone market in the world, according to data released by the International Data Corporation (IDC).

Most of the ingredients needed for a smartphone are in place

In the second quarter of 2012, about 4.44 million smartphones were sold in China and 388 million users accessed the internet via mobile phones. Unlike in the US, demand in China continues to grow, making it a particularly desirable market to tap into. IDC said China accounted for 26.5 percent of all smartphone shipments in 2012, compared to the US’s 17.8 percent. China’s smartphone market, unlike the US, is driven by a “strong end-user demand for lower-priced smartphones”.

Chinese demands
In order to fit in with the current Chinese smartphone trends, Microsoft will need to make a high-specification, low-cost phone to gain a foothold in the market. The devices that make the most sales in China tend to be high-power devices, reasonably priced, with screen sizes near to the 13cm mark.

Smartphone companies have been keen to fulfil these criteria to boost sales, and the last six months have seen the release of Huawei’s 11cm display Honor II, at 1,888 yuan ($305); the Xiaomi’s 11cm Phone 2 at 1,999 yuan ($310); ZTE’s 11cm U950 at 999 yuan ($160); and Meizu’s MX 4-core, which now retails at 2,399 yuan ($380).

There is also fast-growing demand for even cheaper phones. Statistics released by market intelligence firm Canalys suggest that by 2015, half of all Chinese smartphones will retail for under $200. A further sub-$160 market is drawing the attention of some companies. Lenovo, for instance, recently attempted to snatch up some of these sales by dropping the price of its entry level Android, the A65, from 1,000 yuan ($160) in Q4 2011 to 700 yuan ($112) in Q1 2012.

This wouldn’t be the first time Microsoft has made a play for the smartphone market. The company’s previous attempt was the short-lived ‘Kin’. Although the social media orientated phone had some interesting features, it was dead on arrival due to a prolonged development period and a lack of promotion and consumer awareness. It was discontinued after a mere 48 days on the market.

Taking the market
Microsoft’s Windows Phone 8 OS, having only been released a matter of months ago, is still baby-faced. Microsoft made 3.6 million unit sales for Q3, according to the IDC, giving it a mere two percent of China’s smartphone sales. Apple’s iPhone, for the same period, sold 26 million units: about 14.9 percent. Android’s sales are dominant at 136 million: equivalent to 75 percent.

Other companies, such as Baidu, Alibaba and Xiomi, make up the remainder of the market. Each has attempted to create successful smartphone operating systems for the market, but none so far has had much luck with capturing significant portions of sales. The Chinese market will not be easy for Microsoft to crack.

With plenty of other domestic and international developers currently competing for the lion’s share of what is a valuable market, the competition is fierce. Asian consumers are more familiar with Androids (90 percent of smartphones there are Androids), so Microsoft will have to push hard to ensure consumers adopt its new Windows Phone OS.

With only a handful of smartphones running the Windows Phone 8 OS available, Microsoft may well need to offer up some different devices to grab as great a market share as possible. It would not be a huge surprise, then, if the company sent in its own reinforcements in the form of a wallet-friendly, high-spec, uniquely Microsoft phone to capture the interests of Chinese consumers.

With most of the pieces of the puzzle available to Microsoft, it seems a strong possibility that they will venture into smartphone territory. After all, they have the hardware and software available to them, and CEO Steve Ballmer recently stated that the company would “obviously” be making more hardware.

However, IDC analyst Melissa Chau suggests that Microsoft’s current hardware testing might not necessarily be a step in the direction of its own product release, but a way to show partners the direction Microsoft intends to take with future Windows Phone devices. At the moment, Microsoft is relying on Nokia’s Lumia phone (which sports the Window 8 OS) to push the platform forward.

If the Lumia were to fail, there would be a negative knock-on effect for Microsoft that could be fatal for the market penetration of the Windows mobile brand. Therefore, Microsoft may keep the possibility of its own device up its sleeve as a plan B. Microsoft’s plans are still relatively unknown, but the components for a smartphone are in place. If the Surface is a success, the firm may diversify its mobile offerings and make another attempt for the smartphone market.