Microsoft is focusing on improving its entertainment and devices business, which includes PC gaming device Xbox, the Zune portable media player, as well as its Windows mobile operating system. These businesses together account for just under 10% of Microsoft’s stock value by our estimates.
While Windows phone 7 hasn’t generated as much revenue as expected since its launch last year, management is confident that Windows 8 will be able to provide the much needed boost to help challenge Google’s Android and Apple’s iOS. Meanwhile, Microsoft will also earn hefty income from the licensing deals signed with around 7 smartphone vendors.
While we anticipate Microsoft’s revenues from PC games, Windows Mobile and other consumer software will increase from $2.9 billion in 2012 to $3.9 billion by the end of our forecast period, Trefis members expect an increase from $3.2 billion to $4.7 billion during the same period.
We currently have a Trefis price estimate of $28 for Microsoft’s stock, about 15% above the current market price..
Windows 7 Phone Sales Slow, Management Optimistic
Windows 7 Phone saw strong sales for the initial few months after launch in October 2010  but since then the sales have slowed down with market research firm AC Nielsen estimating that Windows Phone 7 accounts for just 1% of the mobile market versus 38% for Google’s Android, 27% for Apple’s iOS and 21% for RIM as of June 2011. 
However, Microsoft recently showed developers a preview of Windows 8 and it is quite optimistic that the new OS, with its radically different look and feel and a touch-centric user interface, will boost Windows phone 7 sales. It is also planning to launch an app store, in a nod to the success of Apple’s powerful ecosystem of products and distribution platform for apps and updates. Moreover, with Google acquiring Motorola, Microsoft remains the only pure smartphone software provider which should make it a better alternative over Android and iOS and thereby attract more smartphone vendors.
Income from Patent Licensing Deals
Microsoft has a total of 7 Android patent licensing deals with the last two coming from Acer and ViewSonic. (See Microsoft Signs with Acer and ViewSonic for License Fee from Android Sales) Under these agreements, the companies will have to pay Microsoft a fixed licensing fee for each Android device that they ship. It also has deals with manufacturers like HTC, General Dynamics, Wistron and Onkyo from whom it nets around $5-$15 for each Android device sold. In this way, it can also encourage these manufacturers in using Windows Phone 7 over Android.