Microsoft Corporation Gains a Key Ally for Windows Phone, but Will Others Follow?

By Markets Fool.com

Microsoft 's short list of Windows Phone partners just grew slightly longer with the addition of LG . The South Korean tech giant recently partnered with Verizon Wireless to launch the LG Lancet, its first handset running Windows Phone 8.1.

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LG Lancet. Source: Verizon Wireless

The Lancet is an entry device equipped with a 4.5-inch 856x480 display, a quad-core 1.2GHz processor, an 8MP rear camera, and a VGA front-facing camera. It comes with 8GB of internal storage, which can be expanded up to 128GB via the MicroSD slot. The Lancet will cost just $120 off-contract. Verizon is offering the phone to Edge customers for $5 month with a 24-month contract.

LG previously released a Windows Phone 7 handset back in 2010, but the company subsequently stuck with Android over the past five years. Does LG's return indicate that more Android handset makers might follow?

Why LG returned to Windows Phone
To understand why LG launched a new Windows Phone, we should discuss the current state of the Android market.

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The cost of Android smartphones has dropped dramatically over the past few years, due to "turnkey" reference designs from major chipmakers like Qualcomm and Intel . These designs, which are essentially templates for new phones, enable small companies to launch new smartphones on limited budgets within a few weeks. This influx of new low-margin rivals has made it tough for mature players like LG to gain market share.

Research firm TrendForce expects LG to control 6.1% of the global smartphone market throughout 2015. By comparison, LG's market share jumped from 4.3% to 6% between 2013 and 2014. LG was the fourth largest smartphone maker in the world last year, but it slipped to sixth place by January 2015, falling behind Samsung , Apple , Lenovo , Huawei, and Xiaomi.

Therefore, it makes strategic sense for LG to diversify its product portfolio with non-Android handsets. Granted, Windows Phones only accounted for less than 3% of the smartphone market at the end of 2014, according to IDC, but it's still the third largest mobile OS in the world after Android and iOS.

How this fits into Microsoft's mobile strategy
LG's return with a low-end Windows Phone complements Microsoft's strategy of undercutting cheap Android devices to sow the seeds for its upcoming Windows 10 launch.

Windows 10. Source: Microsoft

Since Windows 10 will be installed as an upgrade to all Windows 8.1 Phones -- from the $70 Lumia 435 to the high-end Lumia Icon -- Microsoft sacrificed revenues to boost shipments. That's why total Windows Phone shipments rose 18% annually last quarter as revenue fell 16%.

Prior to shifting its focus on the low-end market, HTC, Samsung, Huawei, and Microsoft were the only companies that launched Windows 8 Phones. But after making Windowsfree to handset manufacturers, smaller emerging market players -- including Gionee, JSR, Karbonn, ZTE, XOLO, Longcheer, and others -- signed up. Lenovo also stated that itwould launch a Windows Phone this summer.

Microsoft is turning the tables on Google with two tactics. First, it became an attractive way for Android OEMs to escape the commoditization of the Android market. Second, it mimicked Google's strategy by offering a free OS to cost-conscious manufacturers. This new approach could boost Windows Phone's global market share to 5.6% by 2018, according to IDC.

LG's return probably won't be a game changer
LG's return to Windows Phone is notable because it's a "first-tier" brand like Samsung and HTC. Yet it's not a game-changer by any means.

LG, Samsung, and HTC might occasionally manufacture Windows Phones, but the majority of their handsets will still be Android ones. Samsung's most recent Windows Phone was the ATIV SE, which closely resembles the Galaxy S4, from last April. HTC's newest Windows Phone is the One M8 variant which arrived last August. Simply put, these first-tier players aren't putting much effort into their Windows Phones -- they're just tweaking popular Android designs and installing a new OS on them.

HTC's One M8 (L) and Samsung's ATIV SE (R). Source: Company websites

Microsoft's own Lumia devices still account for nearly 97%of the entire Windows Phone market, according to research firm AdDuplex. This means that first-tier players like Samsung and HTC have barely made any gains in this market. Therefore, it's unlikely that LG, with a single budget device, will fare much better.

But stay tuned ...
It's encouraging that LG, Samsung, HTC, Lenovo, and other established smartphone makers are launching Windows Phones. However, these first tier players must distinguish these devices from their Android counterparts to truly stand out. Otherwise, Microsoft will have to keep relying on itself and low-margin emerging market players to grow its market share against iOS and Android.

The article Microsoft Corporation Gains a Key Ally for Windows Phone, but Will Others Follow? originally appeared on Fool.com.

Leo Sun owns shares of Apple and Verizon Communications. The Motley Fool recommends Apple, Intel, and Verizon Communications. The Motley Fool owns shares of Apple and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.