Highs and Lows Part II: Microsoft's smartphone strategy and the seeds of success

In "Highs and Lows Part I: Are Low-End Windows Phones Hurting Microsoft's Smartphone Brand?" we discussed Microsoft's strategy to increase its market share by targeting "the next billion" by disseminating low-end, low-cost devices into the mobile space.

In this and the two following pieces, we will look at that strategy and more within the context of Microsoft's larger strategy to acquire, engage and enlist consumers.

Lay of The Land

In an agricultural society, fertile land and knowledgeable and patient farmers are essential to the survival of a community. Crops need a farmer that knows the land, understands the climate and how to help their crop weather the storms. A good farmer is also a nurturer and has a long term view. Concerned about changes in climate that could affect their crop, they may glean from the foresight contained in a farmers almanac.

They see from season to season and from harvest to harvest. They understand that a seed, once planted, will face many challenges and require much time before its fruit will be ready to be harvested. They also choose the crop wisely. They plant what they know will flourish in a particular environment. And they also plant strategically. Choosing a crop that will transform the soil, nurturing it for yet another crop that will flourish in the future. They don't approach planting haphazardly. There is always a plan.

During Convergence 2015 Microsoft Chief Marketing Officer, Chris Capossela gave attendees an in-depth view of Microsoft's long term marketing goals and branding strategy. He spoke of three key areas that are essential to building a strong and committed base of users, or fans as he calls them. Capossela's address focused on the three steps of acquiring new users, engaging them to use the companies products and services, and finally enlisting them as fans that promote those same products and services. Microsoft has taken a lay of the land and believes that it has a plan to yield a plentiful harvest of enlisted fans.

"We will think of every user as a potential "dual user" — people who will use technology for their work or school and also deeply use it in their personal digital life. They strive to get stuff done with technology" – Satya Nadella

Sowing Seeds (or Sowing their Wild OS)

In part one we took a look at Microsoft's low-end strategy. We saw how the company has engaged in a deliberate approach to the market that has precluded the introduction of high-end devices, in lieu of low and mid-range smartphones. To the eager enthusiast impatiently awaiting Microsoft's next flagship device, this strategy may appear counter-productive.

How can you entice new users without an enticing flagship?

A closer look at this strategy yields a deeper truth.

In the same speech at Convergence 2015, Capossela spoke of Microsoft's new freemium model. This model allows the company to offer an introductory tier of its products and services to customers for free. This model is not a trial but a truly free iteration of products such as Office. To unlock some higher end features, or to use Office on a device above 10.2 inches, Chris shared that Microsoft sees more value to the product, and a paid subscription would be required. But the meat of the message is that Microsoft has moved its most lucrative, $25 billion per year business, over to a freemium model.

Why?

Well, to acquire users, of course. Chris shared that once Microsoft offered Office on iOS and Android for free the company saw 40 million additional downloads of its product. This number has since grown to over 100 million. That's 100 million more devices users were eager to put Microsoft's product on. That's 100 million more engagements for Office, all because of a new platform. Office 365 subscriptions seem to be benefiting, also, with over 12 million paid subscribers currently.

Give It, and They Will Come

Here's a valuable observation Chris and Microsoft's senior leadership made. There were no marketing dollars required to acquire those 100 million new mobile Office downloads. A simple announcement of the availability led to excited users swiftly downloading the Office apps to their devices. With a freemium model, the team realizes that investment in marketing is best placed at the engagement stage, rather than the acquisition stage.

What does this have to do with Microsoft's phone strategy you ask?

Well, the same principles apply here. Microsoft can't simply give phones away for free. That's just bad business. The costs that go into designing, manufacturing and distributing devices are too high for a pure freemium model when it comes to hardware. However, the next best thing to free is cheap. Or rather, affordable.

Enter budget-friendly devices. As we know, Microsoft's most successful devices are its lowest cost models. For example, the Lumia's 520, 535 and 635 make up a sizeable chunk of Windows Phone market share. As mentioned earlier, many customers that are buying Microsoft's low-end devices may not necessarily be seeking the Windows Phone platform.

Unlike consumers who actively shop for iOS, Galaxy and other popular Android brands, most who purchase Microsoft's low-end devices are simply looking for an affordable, or more to the point, a cheap option. But like the freemium model of Office on iOS and Android, this low-end, low-cost strategy yields the acquisition of new users for Microsoft's devices and services.

Weathering the Storm

A test for any farmer is how they protect and nurture the crop during the unavoidable storms that threaten the harvest. Microsoft faces a similar challenge with its crop of users. Without a doubt, Microsoft has endured difficult years in the mobile space. Despite its best efforts, the market has not yet embraced Windows Phone. The growth in numbers of Windows Phone devices in the hands of consumers who have been acquired, has then been offset by a growth in the overall size of the entire market. This lack of growth has yielded a relatively static 3% share for Windows Phone.

Though Microsoft's low-end strategy is not yet producing the same level of fanfare as it's rivals it is achieving its goal. It is acquiring users.

In the meantime, Apple has seen record sales of its iPhone 6 and 6 Plus. The Cupertino company has also achieved strong growth in the world's largest mobile market, China, where Windows Phone has less than 1% share. Samsung has continued its onslaught with the release of the new Galaxy S6 and Galaxy S6 Edge flagship devices. The market is saturated with excitement surrounding these two popular brands. The competition is unrelenting. So it seems, also, is Microsoft's resolve.

Remember, a good farmer takes a long-term view. Planting what they know will flourish in a particular environment. Also strategically choosing a crop that will transform the soil in preparation for the future.

Plant First, Reap Later

Without the acquisition of new users, Microsoft would never be able to move to the stages of engaging and ultimately enlisting. As with any strategy that requires growth and nurturing, this process requires time. Microsoft's strategy incorporates a long-term view that appears to ignore the engaged and enlisted enthusiasts who champion the platform. That segment, of which I am a part of, however, is small. Too small to sustain and perpetuate the ecosystem in the way a larger user base could. Like Apple's large and passionate fan base does. Thus, Redmond's efforts have been to grow overall.

Many enthusiasts have argued offering a high-end device now, rather than this low-end approach, would be a better strategy. But, with high-end devices like the Lumia's 920, 928, 930/Icon, 1020 and 1520 Microsoft has already made its play at acquiring users through flagship devices. And it failed. Repeatedly.

Insanity has been described as doing the same thing repeatedly and expecting different results.

I'm just saying.

Some may argue that limited availability, limited promotion and poor sales associate support contributed to the market failure of these devices. I completely agree. But a deeper truth is that most smartphone consumers who would be inclined to purchase a costly high-end device, well, they are already engaged within a rival ecosystem.

By no means am I advocating that a high-end Windows Phone has no place. Far from it. I'm saying that just as with the planting of crops, timing is crucial.

Not only are Apple and Samsung (and other Android) devices in the hands of millions of people with 97% of smartphone market share, but millions of people are invested in the Apple and Google ecosystems. The flagship Windows Phones mentioned above presented to the masses an unfamiliar experience and an unfamiliar ecosystem with apparently no engaging offerings. The masses barely noticed the narrow chute of high-end Windows devices peeking through the mobile soil, so overrun by the iPhone and all the Android smartphones.

Additionally, those Windows devices were priced at about the same level as the competition that the consumers already wanted to purchase. Smartphones that would have brought them to an ecosystem with which they were familiar. These were the primary barriers to the success of Microsoft's previous flagship smartphones: investment in a rival ecosystem.

Sadly, Microsoft's late real entry into the transformed mobile space allowed rivals to lock users in.

Let the Wheat and Tare Grow Together

"We will reinvent productivity for people who are swimming in a growing sea of devices, apps, data and social networks. We will build the solutions that address the productivity needs of groups and entire organizations, as well as individuals, by putting them at the center of their computing experiences."

The principle of allowing a desired crop and weeds to grow together until harvest time is an age old lesson. Microsoft has realized that trying to sell a crop of devices directly to a market that has a taste for something else is ineffective. So Microsoft devised a plan to both acquire new users of its products and services, and to change the tastes of those engaged in other ecosystems in favor of their own.

The former is being achieved by the low-end strategy where the target audience is not yet committed to a competing ecosystem. To accomplish the latter, Microsoft has launched a crop of it's products and services among the weeds on rival platforms. Many of which have launched in better iterations than their Windows counterparts. Some, like Office Sway (opens in new tab), have even launched exclusively on rival platforms with no Windows version as yet available. Satya Nadella has addressed these realities with the promise that the best Microsoft experience will be on Microsoft devices. I anticipate this yet to be realized promise will be manifested in Windows 10.

Furthermore, Microsoft has a strong and highly recognized brand among the top 5 in most surveys. As such it is the Microsoft brand that the company is strategically seeking to promote by way of its cross-platform efforts.

Capossela shared the following at the March 16, 2015 Convergence event:

"We've spent about four or five months coming up with this simple notion of what Microsoft really wants to stand for, you know, what is our brand, what do we want to be. And we landed on this notion that our products are all about empowerment, our solutions are all about empowerment."

This quote hails back to Nadella's words in his July 10, 2014 memo to employees:

"We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more."

By extending its productivity tools to other platforms where they will ideally be used in lieu of first-party solutions, Microsoft extends and introduces its brand presence into rival space. Microsoft Office is but one example. Strategic purchases of cross-platform solutions like popular mail app, Acompli, and rebranding it Microsoft Outlook is another.

Microsoft also purchased LiveLoop, which makes cross-platform sharing of Powerpoint presentations easy by converting them to a URL. The purchase of Sunrise, a cross-platform calendar solution, is a yet another example. Datazen a leading cross-platform business analytics tool, also recently purchased by Redmond, extends the Microsoft brand even further into rival space.

Wheat and Tare.

Making the Unfamiliar Familiar

By infiltrating rival space with Microsoft productivity tools, Microsoft can effectively decrease users' engagement with solutions inherent to that rival platform. With Nadella's express goal of making Microsoft devices the best place to experience Microsoft solutions, the company's long play includes winning users from other platforms by first acquiring and then engaging them through cross-platform tools.

Yes, by introducing and engaging users with elements of Microsoft's ecosystem, Microsoft eradicates the first barrier to flagship Windows Phone success: An unfamiliar ecosystem. Redmond will have effectively changed the tastes of many in favor of Microsoft's crop.

"As a farmer strategically plants one crop to change the soil in anticipation of the planting of another; Microsoft's cross-platform initiative may change the soil of the mobile landscape preparing it for a coming crop of Microsoft branded flagship Windows 10 devices."

The second barrier, an unfamiliar UI/OS, is addressed with Windows 10. This ubiquitous OS that runs on diverse form factors will be available to hundreds of millions of PCs for free beginning this summer. With Windows PCs boasting a 90% market share, most people own a PC powered by Microsoft's OS. Additionally, as a result of Microsoft's diligent collaboration with consumers and the enterprise by way of the Windows Insider Program, many will likely embrace the upgrade to Windows 10. The familiarity presented by the Windows 10 Modern UI will help eradicate this second barrier to flagship Windows Phone success.

Finally, universal apps will allow developers to write once for all form factors. Additionally, developers will now have the ability to reuse code used in their iOS, Android, Win32 and .NET apps to create Universal Apps. Companies will also be able to register their websites with the Windows Store where they can then be accessed by users as an app. App gap? What app gap?

Ready to Engage

Microsoft's low-end strategy allows the company to plant the seeds of a potential harvest of engaged and enlisted users, in the fertile soil of high growth markets. Additionally, in following the pattern of the freemium model, relatively few marketing dollars are required in the acquisition stage. Just as there is an intrinsic motivation for iOS and Android users to download free Office apps for their respective platforms, there is a motivation for the target population of Microsoft's low-end strategy to purchase these devices. They're affordable. Consumers looking for affordable devices buy Windows Phones. Microsoft's goal, of course, is to then engage these users with their products and services.

Unlike the millions of iOS and Android users who downloaded Office, many consumers of low-end Windows Phones will not have been enticed into their purchase by the brand of integrated products and services. Microsoft will have acquired these users through offering affordable devices. The challenge for Redmond now is engaging this crop of acquired users with Microsoft services and over time transforming them into a harvest of enlisted fans. Of course, a good farmer doesn't approach his planting haphazardly.

He always has a plan.

Stay tuned for Highs and Lows Part 3: Microsoft's Smartphone Strategy, Rules of Engagement

Chime in below and on Twitter we've much to discuss!

Jason L Ward is a columnist at Windows Central. He provides unique big picture analysis of the complex world of Microsoft. Jason takes the small clues and gives you an insightful big picture perspective through storytelling that you won't find *anywhere* else. Seriously, this dude thinks outside the box. Follow him on Twitter at @JLTechWord. He's doing the "write" thing!

300 Comments
  • No one's gonna buy a high end of an unknown OS. Satty Boy said that they will conquer the phone market by 2017....
    I think he was right, planned all along.
    ------------
    Sowing Seeds>Familarity>Acceptance.... EDIT: Nice one Jason. Clears many things for new fans/followers of WP.
  • I see the problem as reversed. Why would I start in WP if the end game is to graduate to Android or Apple?
  • Who says it's all graduating to Droid or Apple..?
  • what are they graduating to? The last flagship was the 930.
  • Well if you think according to Microsoft's perspective....
    Will they make a flagship again for 8.1 only..? They have the hardware ready but not a complete software.
  • The problem with this strategy is what was partly covered in the first part of these series of articles: WP means "cheap" now. So it doesn't have the prestige required for anyone to seriously consider the device. Look how everyone around the world is basically wishing to buy a $500+ iPhone. Why is that? It's because of that same prestige that causes so much of the world to go for that expensive device. Even in 3rd world countries - like here in Iran - you look around and it feels like 1 out of 3 people has an iPhone. Also, by adopting this strategy, Microsoft is losing the mindshare among tech enthusiasts and experts who actually direct the potential consumer towards a Microsoft device. This was also pointed out in the first article: they don't know WP also has quality devices, and they try to dissuade the potential consumer. In addition to that, the current WP users are forced to stick with their current device and feel abandoned especially when they see better Microsoft services on competing platforms. So here is the best strategy: focus on the low end for all the reasons mentioned here, but also have ONE high-end device - the 9XX series - that can be showed off in ads, can create mind-share, and current WP users can upgrade to or at least talk about in online forums. So it's OK to discontinue 10XX and 15XX series for the time being, but that one flagship is necessary.
  • No you are wrong I've seen almost every tech reviews of Lumia devices .. They talk all good things about Lumia camera.. Build quality.. Display ..but in the last conclusion they say everything flops due to the flappy OS!! ..i mean to say MS decision is correct that without the right S/W its no use of releasing a flagship Lumia now!!
  • Having the flagship by no means saves WP, but not having it is worse. Now no one reviews a high-end Lumia, because there is none. There needs to be at least one, so the good talk about quality, etc. can continue.
  • I like what you said about the Lumia brand-new being synonymous with "cheap" low end devices. It doesn't matter if the quality of the services us actually exceptional for the price. Releasing a flagship under the same name will be a problem. People buy iPhone's without a car for it can actually do because Applegarth positioned themselves as a luxury/lifestyle brand so people believe owning an iPhone is a reflection of your status. Microsoft needs to do the same to sell their phones at premium !!! Toyota for all their excellent bold quality and reputation couldn't all luxury vehicles till they branded them Lexus. Same goes for Nokia (N-Series) Nissan (infiniti) Honda (Acura) etc. . . I've always scoffed at the idea of a Surface Phone but I see the sense in cbranding flagships that way now
  • Actually the Surface Phone replacing the 9XX series is not a bad idea. except the Lumia series would have to become all low end after that...
  • The problem with iPhone it's a commodity and eventually commodities are subjected to wild fluctuations, i.e. waning consumer tastes...the upside is great when you're first but so is the downside...remember Atari...
  • As a 1520 owner, I cant downgrade to a smaller screen.  Havent seen a design that nice and stylish in any other phone.  Throw in the new talkman octacore type hardware and it would be perfect.  If no 1520 successor, MSFT will lose many who currently own one.
  • @agentthegreat Thanks for the feedback. Appreciate the input ti the discussion.
  • What a naive thought. Apple is losing market share and mindshare, with it's global market share going down from 35% to 14% in 2015. Despite the new Iphone 6 and 6+ Iphone global market share of IOS has not budged either. In the US their market share even declined by 1% in Q1 2015. Microsoft is refocusing and that means temporarily no new high end phones, putting their resources to better use with their new direction. Even without a high end phone, Microsoft is proving to be resilient in the market place, growing unit sales YOY, at least in sync with the overall market growth, and not to forget, taking market share from IOS and Android. So you can imagine what will happen when Microsoft introduces it's high end phones in 2015. For Android the story is almost the same, no spectacular or true growth. This writer compares Microsoft smartphone strategy with a farmer, but the comparison is skewed. Where farmers only have vegetables/fruits or animals, WP is a subplatform and is integrated with the other Microsoft platforms like Office, Windows, Azure, Hololense and the Xbox One. He also does not take into account that Microsoft's userbase is mainly Enterprise and businesses (who pay a lot for the products from exclusive farmers) and not the consumers (which mostly buy the low end products from the farmers). That's WP's strenght, that's why WP dethroned the Iphone in the UK with more than 29% market share in the Enterprise market in Q1 2015. the UK.  Did BMW not buy 35000 Lumia devices in 2014 for all it's workers. That's where WP will start dethroning the Iphone and Android phones first, followed by the consumer market. 
  • Your first comments remind me about the blackberrry (haha, had to sit back to think about that name for a few seconds) outage a few years ago. When this wallstreet guy was interviewed. (Paraphrasing) "i don't care about the blackberry outage, it is just embarrasing that my freinds see that i still have a blackberry". This says so much in the mobile war. Apple is still seen as the luxury everyone would like to have. Regardless of quality and features. The key lies in the last comment. Go after large corporate purchases and it will trickle down. But what do i know. :-) I do think the biggest way to gain share and get their device out there is through corporataions.
  • Look at the success of brands like Xaomi or 1 Plus, in markets like India which is a major focus for Microsoft there are a plethora of value brands that are hurting Samsung. If Microsoft can tie up with them (they are already doing that) then they will start getting the large numbers they expect. Mobile hardware has hit a ceiling as far as specs are considered and most consumers in India are no longer willing to pay a heavy price for the same specs. The Lumia brand can act as a flagship in various categories by offering better build quality, better camera etc. Even Samsung built its base in the low end of the market before transitioning to high end. It is doable.
     
  • True... Lol. Hopefully from this year on well see consistent HE launches from MS.
  • The 930 is as much a flagship as you can get this days. On any platform. The problem is with the OS not the device. It is pretty good but still feels crippled at times because of the not-very-open platform and of course the store problem (which gets less of a problem by the month).
  • With Apple, you have to jump into the deep end. THere is no low end model to graduate from. THe only option is to buy a 2 year old model that you will be forced to upgrade when the new verion of IOS no longer supports that model. With Android, the experience on low end models is pretty poor and there is a good chance you won't receive updates to get a new versions of the OS. So, on the low end, windows phone is one of the better options. You know you will get pretty good performance, the OS iseasier to use than android, and you can get an update (you can use developer preview if the carrier takes too long to push an update). If the app gap closes, there won't be any need to graduate to android or Apple.  
  • Exactly. Low end market is the right area to hit till WP becomes popular and 10 is ready.
  • I completely agree. Go where you have success and make your offering the best in that segment. The focus must be on low end - I have no problem with that. BUT, you must have at least one flagship too. Even if you know it wont sell much. The brand needs it.
  • Agreed!
  • windows mobile 10 will never be complete...they have said!! its going to be a service which will be constantly improved...
  • Just like any other OS.  
  • That's a good thing cause constant updates= Constant Happy Customers (Like me)
  • Except Android one. Upgradeable up to two OS's (correct me if I'm wrong) and it's cheap at a low end. Not bad if you ask me.
  • I think you have a vision of people that have money to do things.  That´s no what happens in 90% of the time. People who buy a low end phone are not worried about getting the flagship in the future, they are worried about spending the least to have what they need. They will eventually get a 930, once its price is down to an entry level device, when 930 is the new 530.  Those people are more interested in cost/production than flagships or brandings, thats exactly what Microsoft needs right now. Once they get the low end marketshare, it will attract developers and pair apps with other platforms, then we will be ready to attack the high end spectre. Judging by the past, if flagships and inovations are what bring customers, the Lumia 1020 would dominate windows phone sells, not the 530.
  • Why graduate to Apple or Android? With the latest bit of goodies, I cannot see how all developers would releaase their apps to WP. Remember, the developers are not fan boys. They are businesses trying to earn a living; ergo any way I can permeate the market. Microsoft has essentially all but guaranteed a robust app market. I think the graduation will be to a high end windows phone!
  • Another platform to develop means more time consuming but with the Android/iOS tools for WP coming up I don't see why devs can't make more EASY MONEY from another platform
  • Nobody is going to buy something that they have no idea about.....
    ®®®®®®®®®®®
    Marketing, and all aspects of marketing, are super critical.
    Any, strategy, as listed in the article, is useless if the average consumer isn't exposed to it in great amounts..... It's all about root cause.
  • Microsoft can win this game in two ways:   Quantitatively ---> low cost ---> scale gain (highly profitable) Product with differential ---> high-end ---> hence little amount (also highly profitable)   They are attacking both fronts and are counting on product life cycles as well (iPhones and Androids have life cycles too, so they know when and where to kick off). Everything is planned, of course. Marketing is key too, fact!
  • AgreeAgreeAgreeAgreeAgreeAgreeAgreeAgreeAgreeAgreeAgreeAgreeAgreeAgreeAgreeAgree
    ............
    I Agree.
  • What evidence do you have that scale gains this low margin low cost space is highly profitable?  EBITDA is falling dramatically as they pump out these cheap garbagey phones.
  • My proposition suggests that they inccur in risk. Hence they CAN win, which I humbly believe they will. Not saying they will. And those product profiles are profitable, meaning, if someone's sales are successful, those can generate profit. Sorry for my english. ; )
  • Ummmmm, if MS seriously focused on the high end as much as they do on the low-middle end, while still maintaining as much focus on the L-M, they could kill it with W10... The feature, and functionality, set rivals it's competitors now, maybe even beating iOS now, and if apps come it will be over with.... If apps come the word will spread just as it did with Android, and sales associates gradually will have nothing negative to tell customers.... The good thing about sales associates is their turnover rate.. Lol...
    .........
    So, I think you're right... MS does have a chance at relevance in mobile...
  • Agree, agree, agree, agree! LoL! Seriously, I agree! Now, a bit off OP topic, I liked a lot what Satya said about "the last Windows"! Someone here's just written on this... So cool! There's that, W10 is where the force is strong in them... It's like, no competitor has everywhere the same code base running on their systems! This has so many useful utilities! I'm like, OMG, Windows is so cool, so complex, competition is so behind those guys at Microsoft that when phones get that status, man, it'll be something nice to watch! Market indicators will change! Well, that's our hope, that's why is off topic. LOL! Nice Rodney! Been here since 2012 as a reader, nice exchanging information now. Very cool place, this one! I like it. ; )
  • That's the plan..... I still think these articles don't blame marketing enough... Maybe 3, and 4, will address Marketing..
    ..........
    But, MS definitely is on the right track.
  • I'm watching(not willingly) almost 10 Ads of MS on most of my favorite channels(HBO, SMovies etc) every 1 hour or so. So, I'm pretty sure Consumers are getting mesmerized lol
  • Ads for what❓
  • Lumia 640XL features and stuff. There should be a commercial ad on youtube somewhere
  • So Aman you basically commented without reading the article so you could be the first commenter?
  • I pity folks like you, who just come to spit venom on WC and don't contribute anything. And I don't think th