Microsoft WP success depends on emerging markets

News and technology Beijing time July 28, according to foreign media reports, Microsoft mobile operating system Windows Phone can be successful, will depend largely on its popularity in emerging markets.

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Microsoft released its second-quarter earnings, although the first quarterly loss in 26 years, but Microsoft when the revenue still impressive. Even if some of the key products are nearing the end of their service life, the revenues from all of Microsoft's core businesses are still growing, even if there is a macroeconomic uncertainty.

However, these revenue increases did not translate into operating profit growth for all Microsoft business units. In particular, Microsoft's entertainment and equipment division suffered operating losses in the second quarter, largely because of the subsidies it offered to Nokia. It is reported that Microsoft paid Nokia 2.5 billion dollars per quarter to allow Nokia to adopt the Windows Phone operating system on its mobile devices. Nokia will pay a license of about 20 dollars to Microsoft for every one of its windows Phone phones sold.

In other words, Nokia has to sell 12.5 million windows Phone handsets each quarter, and Microsoft's license fee will be equal to the subsidy it offers. Given the poor sales of Nokia's Windows Phone handsets, this balance of payments is unlikely to be achieved in the near future. Nokia has also been forced to cut its price by half in the US as sales Lumia, hoping that low prices will spur market demand.

To address the slump in sales, Microsoft is also trying to attract budget-minded consumers to buy windows Phone smartphones by reducing the production standards needed to use Windows Phone. Microsoft's Low-cost strategy is unlikely to be effective there, as U.S. mobile operators subsidise consumers who buy smartphones, but it helps Microsoft win market share in emerging markets where high-end smartphone prices are equivalent to the half of a middle-class consumer's monthly salary.

However, regardless of whether the demand for Windows Phone OS will grow, the profit margins of the Windows business unit may not have a real impact on Microsoft's share price. For example, the calculations show that Microsoft's share price is only slightly higher, even if the windows sector revenue has risen by one fold.

In line with Microsoft's decision to support the Xbox before the Kinect release, we expect the company to continue to inject momentum into its mobile platform, even as Microsoft's mobile division continues to lose money. If the department succeeds, it may encourage users to adopt Windows operating systems on all three platforms, such as PCs, tablets and mobile phones. We set the target price for Microsoft shares at $41.38 trillion, or about 40% of its current share price premium.