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Microsoft Looks to Take a Bite Out of Apple With New Phones

Microsoft is expected to unveil its latest set of smartphones as it looks to take another swing at forging a winning mobile strategy.
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Microsoft is expected to unveil its latest set of smartphones as it looks to take another swing at forging a winning mobile strategy in a world dominated by Apple's iOS and Google's Android.

On Tuesday, Microsoft is set to launch two premium handsets at an event in New York along with other devices such as a new wearable and 2-in-1 Surface tablet and the mobile version of Windows 10.

But with the company forecast to hold just 2.6 percent smartphone market share this year, according to IDC, the mass market is shut to Microsoft, analysts said.

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"They know they've lost this generation," Ian Fogg, head of mobile at IHS, told CNBC by phone.

"Windows as a mobile operating system is now irrelevant for the smartphone market. The reason Microsoft is still continuing to make hardware is to maintain a toehold in that part of the market."

‘Achilles heel’

Microsoft's restructuring announcement in July was a realization of this. In July, it took a $7.6 billion writedown on the handset business it bought from Nokia which completed last year and said it will ax 7,800 workers, mostly from the mobile division.

At the time, Microsoft chief executive Satya Nadella said the technology giant would focus on running a "more effective phone portfolio" and to "narrow our focus" on three segments. "We'll bring business customers the best management, security and productivity experiences they need; value phone buyers the communications services they want; and Windows fans the flagship devices they'll love," Nadella said in an email to employees in July.

At the heart of this is the Windows 10 operating system launched this summer. Microsoft's big push for the operating system is that it works seamlessly across all devices. A feature called "Universal Apps" allows developers to create software that can work on mobile devices and desktops without the need to drastically change the coding. Windows 10 is seen as something that can work cross-platform.

"It's critical for us, we are looking at it as part of a broader ecosystem. We want you to experience Windows across all the devices," a source with knowledge of the matter who asked to remain anonymous told CNBC, adding that the company is being aggressive in pushing its Internet of Things (IoT) offerings which go beyond smartphones to encompass wearables and cloud computing.

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Analysts estimate that already 100 million devices have Windows 10 installed on them. For Microsoft, the operating system is as a potential driver for consumers to adopt its mobile devices, but analysts are not clear whether this maybe be the case with iOS and Android controlling around 96 percent of the market.

"A clear Achilles heel for Microsoft is its troubled consumer device strategy, which now appears to be on a trajectory to get a lift on the heels of Windows 10, although the jury is still out on its potential success," Daniel Ives, analyst at FBR Capital Markets, said in a note on Monday.

Business a ‘key opportunity’

But Microsoft has already made moves to diversify away from relying on hardware sales and this is their future strategy –- not a producer of wide-selling smartphones, but as a provider of services for other operating systems which it can monetize.

Microsoft Office –- its software previously reserved for Windows devices only -– was opened up to Android phones and tablets as well as the iPhone and iPad earlier this year. It also produces the Surface tablet which shows off the capabilities of Windows 10 in the hope other manufacturers begin making similar devices using the OS. Lenovo is already doing this.

In addition, Microsoft has bought a few companies including cloud security company Adallom and calendar app Sunrise. What they all have in common is a focus on productivity, a theme Nadella has been pushing heavily. If Microsoft can get its software and services onto Android and iOS devices, it is able to access majority of the smartphone market and drive revenues, a move analysts see as more fruitful than trying to get people to buy their hardware.

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"It's a much more pragmatic strategy and it's part of a longer term strategy to rebuild and reignite the Windows operating system in smartphones," Fogg said.

And ultimately, the opportunity for Microsoft lays in the enterprise business where it can take advantage of the gap left by BlackBerry's downfall.

"Productivity is the general Microsoft focus and within that business is a key opportunity especially when you look the weakness of BlackBerry in smartphones," Fogg added.