Microsoft's stealth weapon: PC app madness


COMMENTARY Given how far behind Microsoft's (MSFT) Windows Phone trudges behind Google's (GOOG) Android and Apple's (AAPL) iPhone, talking about it almost seems to be a joke. How could anything that Microsoft does in the apps world matter?

It is true the company is hurting for certain in mobile. But apps are about to mean a lot more than software downloaded to a smartphone or tablet. Take the bigger view, and Microsoft may well be on a course to add enormous revenue to its already considerable income.

App-happy phone owners

Most analyses of app sales begin and end with smartphones. Last month, research firm Distimo looked at the Windows Phone 7 marketplace; a pale and puny thing it seems at first, with download volume on the top 300 apps in the U.S. (Apple's App Store for iPhone being 39 times larger than the top 300 U.S. apps for Windows Phone. It's not surprising that Apple sees more volume.)

Microsoft hasn't give out hard numbers on Windows Phone sales. According to 2011 first quarter estimates by Gartner, Microsoft may have activated 1.6 million copies of the operating system. Late last month, the blog TNW estimated that the number of Windows phone copies sold so far might be in the realm of 8 million. That would cover January through November. An estimate by Gartner pegs Windows phone sales at 1.7 million in the third quarter, which would suggest maybe 6 or 7 million total. Let's call it 7 million to split the difference.

Apple sold roughly 56 million iPhones in the first three quarters, plus however many millions of the iPhone 4S between September and the end of November, which could easily be another 12 to 15 million. So call it 70 million iPhones in about the same period and then double the number for the people who are in an off-year for upgrading. That would be 140 million, or roughly 20 times the number of Windows Phone 7 handsets.

If iPhone users are out-downloading Windows Phone users for the top available 300 titles by a factor of 39, it would suggest that they are about twice as active. Even though Microsoft is apparently up to 35,000 apps in its marketplace, it will take significant effort on the part of Microsoft and its hardware partners to catch up.

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But don't forget the desktop

However, Microsoft isn't dependent on mobile apps. If market research firm Gartner is correct, Windows 7 will ship on 94 percent of PCs sold in 2011 and run on 42 percent of all PCs by the end of this year. In other words, Microsoft still has an enormous hold on personal computing. Even if you think, as I do, that the PC is ultimately dead -- in the sense of becoming a tool that only a minority portion of consumers will need -- it's not as though all those devices will disappear overnight.

Enter Windows 8 ... late. The tardy arrival could limit Microsoft's chances on tablets, but that won't eliminate the massive software purchasing on PCs. That's where Microsoft's plan for an app store on Windows 8, much as Apple is including in its Mac OS, becomes a scary financial force.

A lot of purchasing will happen through the app store, and Microsoft will take 30 percent of it all. Forget being a huge software company. Microsoft will have become the largest software reseller in the world because no third party developers will be able to afford not to have their products in the app store. That's going to mean billions and billions in additional revenue at much higher margins than traditional resellers with physical locations can enjoy.

This is going to tick off Microsoft's retail partners to no end. However, the entire way companies sell software is changing, and Microsoft can't afford to stay in place. The result will be significantly strengthened financials for the Redmond giant. It's not an answer for Microsoft's bigger problems, but will be welcome news to management and investors.

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