How Microsoft can beat the iPhone with Windows Phone 7

While it's tough to predict outcomes in such a volatile market four years in advance, there are plausible scenarios under which Microsoft can topple Apple in market share. To do so, Microsoft must position Windows Phone 7 as a low end smartphone, almost like a high end "dumb" phone, while Apple continues going after the highest, most expensive end of the mobile market.

Microsoft and its partners are, in effect, already doing this. Search Amazon and you can find Windows phones such as the Samsung Focus, LG Quantum and HTC Surround for just one cent from US carrier AT&T.

If your phone can check email, surf the web, and play music and videos it already does most of what a typical iPhone owner uses the device for. And if it's free, rather than costing hundreds, many people will take it.

One thing to remember is the smartphone market is not yet the biggest piece of the cell phone world. As Network World's Julie Bort recently reported, 65% of mobile phone buyers plan to buy another "dumb" phone.

I moved up from a dumb phone to an Android last year after weighing the price against the benefits. Including taxes, I was already paying $50 a month for a basic voice plan with limited texting. I could get a free phone and pay another $10 a month for email, which I wanted. But an unlimited data plan from Verizon was $30 a month, so in effect I would pay just another $20 a month, raising my monthly fee by 33%, for the opportunity to upgrade from a phone that did almost nothing to a phone that does everything.

Once I decided the extra $20 a month was worth it, I had to pony up some cash upfront for a Motorola Droid. Networks also charge for iPhones. Both of these prices are less than what $20 a month costs over the two years of a contract, but since it's an upfront charge the price of the phone is still a barrier for those who haven't made the move from a dumb phone to a smartphone.

But what if all these dumb phone buyers suddenly can get a smartphone for free? That extra monthly fee doesn't look so bad all of a sudden. And if a large portion of regular phone owners upgrade to smartphones between now and 2015 there's no reason to think many of them won't choose a cheap Windows phone as long the iPhone continues to cost so much.

To be sure, Microsoft and its partners will still sell some high end phones, but it won't be the minimum price.

Android will continue to soar, with Gartner predicting that Google's mobile OS will take nearly 50% market share by 2015, leaving Windows Phones and iPhones battling it out for second place.

If Microsoft beats the iPhone in raw market share, the outcome would be similar to the current state of the desktop market. The market share of Windows is gigantic compared to Mac OS X. Yet Windows computers are often cheap, and Microsoft has to split the money with hardware partners, driving down its profit margins. Apple, meanwhile, prices Macs at the high end and builds both the hardware and software itself, which is one big reason Apple has higher revenue than Microsoft despite selling fewer computers.

After weighing the costs and benefits, Apple may find that it makes financial sense to sell fewer phones than Microsoft does and pocket a higher margin per device. Gartner says as much with its assumption that "Apple will be interested in maintaining margins rather than pursuing market share by changing its pricing strategy."

The other factor working in Microsoft's favor, of course, is the Nokia deal. Because of its dominant position outside the United States, Nokia still sells more smartphones than Apple. Today, those phones are Symbian-based, but they will be transitioned to Windows Phone 7 as fast as Microsoft and Nokia can make it happen.

There have been some reports that Apple will develop a cheaper, smaller version of the iPhone to go after the low end of the market, but that still remains to be seen. 2015 is a long way away in the mobile market, but the combination of Nokia's existing market share and a Microsoft strategy to target the low end of the smartphone market could well be enough to drive Microsoft sales ahead of the iPhone.