Microsoft: Windows Tablets Will Grab Market Share From Android And iOS

Summary

Windows is on track to grab 10% of tablet sales this year, a big jump from last year's 7% share.

Strategy Analytics also predicts that Windows tablets will sell 22 million units this year and 49 million by 2019.

Microsoft needs tablet sales to help offset its lack of success with its failed Lumia smartphone strategy.

I believe Microsoft (NASDAQ:MSFT) will reap long-term benefits from Windows 10 in tablets. Strategy Analytics published a report that Windows tablet sales already posted a 58% year-over-year increase in tablet sales during the first nine months of 2015. This positive trend could continue well into the future.

The holiday shopping season could deliver Strategy Analytics' estimate that Windows 10 will grab 10% of tablet sales this year. Windows only had 7% share in tablet sales last Q4 2014. Some of the 22 million Windows tablets that Strategy Analytics estimated will get sold by the end of FY 2015 are Microsoft Surface products.

Microsoft needs this positive development to offset its declining Lumia sales. Investors should care that Windows tablets are gaining market share. It helps ease the pain from the fact that Windows now has less market share in smartphones, 2.6%, versus 3.1% three years ago. Steve Ballmer's gamble in buying Nokia's (NYSE:NOK) phone business is panning out disastrously.

Microsoft's $7.6 billion write-off of its Lumia business shows that Satya Nadella is pessimistic over Microsoft's future as a phone hardware vendor. He and I know that subsidizing $40 Lumia phones is a long-term losing proposition for Microsoft.

Strategy Analytics believes that Windows is fast becoming a premium OS for higher-ASP tablets. Windows will allegedly gradually grab market share away from dirt-cheap Android tablets. The chart below predicts that Windows could get almost 1/5 of annual tablet sales by 2019.

(click to enlarge)

From 10% this year, Windows' share in tablet OS will supposedly grow to 18% by 2019. Consequently, the average lower-ASP Android's 68% share will dwindle to 59%. On the other hand, this four-year forecast of Strategy Analytics might still be lower than what Windows could gain in the future.

I reiterate my opinion that, like Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Apple (NASDAQ:AAPL) will also lose market share in tablets. There are now more useful enterprise-centric Windows hybrid tablets like the $499 Surface 3. The Surface 3 could render more expensive iPads very unattractive to business users.

My Own 2019 Guesstimate

I believe Strategy Analytics is incorrect in its prediction that Apple will still grow its tablet share from 22% now to 23% by 2019. This is contrary to current reality. For the past two years, iPad unit sales have posted double-digit declines. Aside from a serious price markdowns, Apple has nothing left to make its iPad more attractive to consumers.

The $629 Surface 3 (with Microsoft Type 3 cover/keyboard) is certainly more useful than the $799 iPad Pro (without keyboard) for most people. As long as Tim Cook is in charge of Apple, the next models of ARM-based iPads will continue to lose ground in the enterprise against cheaper Windows 2-in-1 alternatives.

I therefore guesstimate that iPads could lose market share (by 5% or more) to Windows tablets. Windows, not iOS, could have 23% share in tablet sales four years from now. The iPad Pro is a weak answer to the Surface Pro/Surface Book.

The entry-level $399 iPad Mini also has tough competition from high-quality but cheaper Windows 10 8-inch tablets like Xiaomi's $200 Mi Pad 2. By virtue of its high-margin policy, Apple is unlikely to match the pricing strategy of Xiaomi for Windows 10 tablets.

The decline in iPad's market share will likely continue well into 2019 also due to other factors. Intel (NASDAQ:INTC) is still willing to sell subsidized $20 14-nanometer Cherry Trail Atom processors to manufacturers of $99 Windows 10 tablets.

Windows' future in tablets has a strong tailwind from Intel's continuing subsidies on its latest x86 mobile processors.

Why Windows Is Growing On Tablets But Not On Smartphones

Going forward, I expect Microsoft to permanently let its OEM tablet partners thrive on lower-margin tablets and 2-in-1 laptops. The reason why the Lumia business is dying is that Microsoft tried to compete with $50 Android phones. Third-party OEMs hate it when Microsoft itself competes against their entry-level and mid-range products.

Microsoft's future as a hardware vendor is to be more like Apple - focus only on higher-margin products. OEMs will produce $200 Windows tablets if they do not get back-stabbed by a Microsoft-made $150 Surface tablet.

Nadella should also try the Surface brand for Microsoft's next flagship Windows phones. The Lumia brand is now damaged goods due to it being associated with $50-$100 phones. Surface is now the brand associated with premium/luxury $500+ hardware products.

My Takeaway

MSFT is worth a long-term hold. Windows' growing market share in tablets is a silver lining in Microsoft's struggle on mobile. If Microsoft cannot make it big in phones, the bigger need there is for it to improve its popular high-priced Surface product portfolio.

Microsoft still needs a healthy tablet/computer business to help it replace the lost revenue from giving away free Windows OS licenses.

Furthermore, expanding its popular Surface brand to cover not just tablets is also highly desirable for Microsoft. Not all business or enterprise users gets rewarded with a laptop. The majority of working stiffs in the office are often stuck with desktop tower PCs or all-in-one computers.

I look forward to Microsoft also coming up with touchscreen-equipped all-in-one Windows 10 computers that could replace the iMac in the office environment.

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Source: Microsoft: Windows Tablets Will Grab Market Share From Android And iOS