Microsoft's Windows Phone: 2012 Success

NEW YORK ( TheStreet) -- My first prediction for 2012 is that Microsoft ( MSFT) will succeed in its smartphone efforts and stake out a credible third position behind Google's ( GOOG) Android and Apple's ( AAPL) iPhone.

By the end of 2012, the number of Windows Phone users may still lag behind what could be very close to 100 million BlackBerry users at that time, but the Windows Phone growth rate will almost inevitably be a lot higher, suggesting it may pass BlackBerry as early as 2013.

Having suggested this trajectory for Windows Phone for several months, I am typically met with extreme skepticism. People ask me, "Why? Aren't Apple and Google already entrenched with iPhone and Android?"

I have no beef with the assumption that iPhone and Android will remain the market leaders by a wide margin for at least the next three years.

All I am saying is that Microsoft will be able to get a sustainable and clear position in the marketplace by the end of this year.

So what does Windows Phone have that Google's Android and Apple's iPhone lack? And what about Research In Motion's ( RIMM) BlackBerry?

Let's examine the entry points for Windows Phone in turn:

1. Windows Phone vs. Apple's iPhone:

In many ways, Microsoft copied some key aspects of the iPhone software architecture -- in particular, the end-to-end control of the software, including the centralized update procedure and the absence of customization by hardware manufacturers and carriers.

There are two key differences between and Windows Phone and iPhone, however:
  • Diversity in hardware. Currently, the main Windows Phone hardware makers are Nokia (NOK), Samsung and HTC. LG and Dell (DELL) are the two smaller players right now. This diversity is in stark contrast to the iPhone's single size and form.
    Although the iPhone is available in one screen size -- 3.5 inches -- and lacks a keyboard option, the Windows phones range from 3.7 inches to 4.7, and there is one good keyboard option in the form of the outstanding Dell Venue Pro, which is available SIM-unlocked directly from Dell for only $300.
  • A new user interface. The iPhone interface is great, but many longtime users admit it's getting a little bit stale. In contrast, Windows Phone offers a refreshing take on how to absorb information quickly.

I am not going to argue that the Windows Phone interface is better than iPhone for most people, but I think most fair observers will admit that it's at least in the iPhone's ballpark in terms of refinement and that it has a refreshing style.

2. Windows Phone vs. Google's Android:

Many Android licensees are also Windows Phone licensees, including Samsung, HTC, LG and Dell.

Only one major Windows Phone licensee is not also an Android licensee: Nokia. In contrast, there are several Android licensees who are not also Windows Phone licensees. Most of them are in Asia, but they also include Motorola Mobility ( MMI).

In other words, the hardware overlap between Android and Windows Phone is tremendous. The devices produced by Samsung, HTC and others look essentially the same from a hardware perspective whether they run on Android or Windows Phone.

I've already written that when Windows Phone 9 and Android 6 arrive, we could see the same hardware being capable of running both Android and Windows Phone.

The main difference between Android and Windows Phone lies in what their common licensees are allowed to do with the operating system. In the Android world, the licensees can do whatever they want -- and they typically take advantage of this ability to customize. These licensees see themselves as important technology differentiators, not only in hardware but also in Android software.

This jungle of Android fragmentation has caused tremendous problems. The most obvious is the slow pace of updates to the Android operating system. When Android evolved from 2.1 to 2.2 and 2.3, it took some licensees many months to make these upgrades work with their own proprietary layers. We are now seeing this repeated in the leap from 2.3 to 4.0.

The poor support of software upgrades for Android smartphones has caused meaningful customer dissatisfaction.

In contrast, Microsoft is like Apple. It delivers all of its upgrades uniformly -- spread over a few days or weeks at the most -- to all Windows smartphones, regardless of carrier or hardware vendor.

Android continues to ingest a very large percentage of first-time smartphone buyers. The downside is that many of these people become unhappy, and look to buy a more stable product. The natural choice for many people until the recent year has been iPhone. Now, with Windows Phone 7.5, there is another alternative -- this time with a choice of hardware.

In brief, the two chief grievances among Android buyers may be solved with Windows Phone: (1) Android's poor battery life and (2) the uncertainty surrounding Android OS updates.

3. Windows Phone vs. BlackBerry:

Three of the key reasons people in North America in particular stick with BlackBerry are:
  • The keyboard.
  • The battery life.
  • The email experience.

Neither iPhone nor Android has anything on the market that can compete with BlackBerry in these areas. Yet there is nothing inherent in iOS or Android that prevents Apple or Google from creating devices that compete with BlackBerry in all three.

For example, I have suggested that Apple make a keyboard-inclusive version of the iPhone in order to make a significant competitive dent.

Windows Phone, on the other hand, has come further than both iPhone and Android in narrowing the gap with BlackBerry. The email experience has superior integration with Microsoft Exchange and Outlook. The battery life beats all competitors, period. The keyboard, well, is almost there: The Dell Venue Pro has the best keyboard of any non-BlackBerry device. It may not match the BlackBerry, but it gets a lot closer than iPhone or any Android.

The Android keyboard situation warrants special mention. One would think that among the hundreds of Androids on the market, someone would have come up with the relatively basic and obvious idea of stamping out a handset with a keyboard that's at least 90% competitive with BlackBerry. But no.

The closest attempt at this -- Motorola Pro and XPRT on Verizon ( VZ) and Sprint Nextel ( S), respectively -- is a total joke. Add the abysmal battery life, and you get the picture.

One year ago, I was not as optimistic about the prospects for Windows Phone. But then two things happened that gave Microsoft the opening to compete for third place in the smartphone ecosystem wars:
  1. Nokia CEO Steven Elop wrote the now-famous "burning platform" memo, which made it obvious he was going to tie Nokia's future to his former employer. With Nokia staking its future on Windows Phone, this was the biggest piece of the puzzle that could tip the market in favor of creating a sustained No. 3 position for Windows Phone over the long term.
  2. Google's August 2011 proposed acquisition of Motorola Mobile, which has not yet closed. This must be scaring the daylights out of many Anrdoid licensees. Previously they might have devoted 95% of their efforts to bringing Android smartphones to market, and only 5% to Windows Phone. I now envision that many may switch that mix to 75% Android/25% Windows Phone.

So what could go wrong with my thesis? A lot of things.

The smartphone doesn't exist in a vacuum. Apple's and Google's ecosystems have become very comprehensive, with numerous cloud and content services built on top of, and around, operating systems. In the case of Apple, there are also stores and hardware.

In many ways, Google and Apple have more cloud and content services than Microsoft and have integrated them better. Google Voice, Google Maps, Google Reader, iTunes, FaceTime, iCloud -- you name it. Microsoft needs to unify its corresponding services and make them "idiot-proof" in terms of setup and function.

Have you ever tried setting up Microsoft's "Office 365" service, for example? It felt like getting the space shuttle off the ground, while Google Docs is as easy as riding a bicycle.

Another unanswered question for Microsoft is how it intends to migrate the current users to the Windows 8 world and beyond. Unlike Apple and Google, who have one OS for smartphones and tablets but another one for PCs (Mac OS and Chrome OS, respectively), Microsoft has one OS for smartphones alone (Windows Phone 7.5), and will have another one for PCs and tablets (Windows 8). How will these be bridged?

Then consider that Windows 8 will run in different modes depending on whether it's running on an x86 processor from Intel ( INTC) or AMD ( AMD) or a processor from a company such as Qualcomm ( QCOM) or Nvidia ( NVDA), and the questions for Microsoft become more significant.

That said, if Microsoft can make progress in its cloud and content services, and expand its stores to compete better with Apple stores, Windows Phone 7.5 could compete well with Apple and Google.

If the customer reviews on ( AMZN) are any indication, Microsoft Windows Phone will end 2012 in a lot better places than where it is now.

At the time of publication, the author was long shares of Apple, Google, Qualcomm and Research In Motion.
Anton Wahlman was a sell-side equity research analyst covering the communications technology industries from 1996 to 2008: UBS 1996-2002, Needham & Company 2002-2006, and ThinkEquity 2006-2008.