Investors Price In Failure of Windows Phone 7 Rollout

Published on October 5, 2010

Microsoft will officially launch Windows Phone 7 in New York on Monday, October 11 with AT&T expected to participate as the “premier carrier” for Windows Phone 7 devices.  According to a recent report, T-Mobile is also expected to participate in the launch.  Initially, phones running Microsoft’s new operating system will only be available on GSM networks such as AT&T but support for CDMA carriers such as Verizon is expected in the first half of 2011.

Phone Strategy Under Attack

Microsoft’s strategy in the smart phone market has been under attack in recent months and bearish sentiment on Wall Street increased yesterday after Goldman Sachs downgraded the outlook on the company’s shares to “neutral”.  In addition to concerns about the smart phone strategy, analysts have also been concerned about the threats to Microsoft’s Windows operating system and Office franchises due to increasing popularity of tablet computers led by Apple’s iPad.  The failure of Microsoft’s Kin phone earlier this year has added to bearish sentiment although the Kin was intended for a much more targeted niche market and ran an older operating system.

We have outlined the bullish case for Microsoft based on the depressed valuation of the shares, positive recent financial results, and expected strong results this fiscal year due to a corporate refresh cycle that will take advantage of Windows 7 and Office 2010 after a period in which upgrades were delayed due to both real and perceived shortcomings in the Windows Vista operating system.  However, despite attractive fundamentals, the market is currently focused on smart phones and appears to be assuming that Microsoft’s new operating system will utterly fail to gain any meaningful share from Apple’s iPhone or Google’s Android operating system.

iPhone 4 vs. Windows Phone 7

While we have not personally observed a device running Windows Phone 7, there are many technical and functional reviews of the operating system that have been published.  One helpful video comparing the iPhone to Windows Phone 7 was published in late September by the website and appears below.

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From the video, it appears that Windows Phone 7 is a very different operating system from the iOS 4 system that runs Apple’s iPhone.  The ability of Windows Phone 7 to easily customize the home screen with “active” content rather than just with links to applications seems attractive, although the reported lack of fast app switching could be a deal breaker for some users.  Like any first release of software, Windows Phone 7 lacks some features that will be enhanced in the future.

Windows Phone 7 may not represent a breakthrough release that will rapidly gain market share, but it also does not appear to be entirely uncompetitive and should appeal to some consumers.  Given the steady drumbeat of negative sentiment on Microsoft, anything short of a total failure with the Windows Phone 7 rollout could represent a catalyst for investors to revisit the intrinsic value of the company’s core cash generating businesses.

Disclosure:  The author of this article owns shares of Microsoft Corporation.

Investors Price In Failure of Windows Phone 7 Rollout
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