Microsoft and MTS have announced a partnership to promote the new range of Windows 8 smartphones, notebooks and tablets. Microsoft is looking to utilise MTS' extensive customer relationships and network of retail outlets to tap into the consumer story in Russia. BMI believes Microsoft will benefit from partnering with MTS, which , as the largest mobile operator by subscriptions, and a leading consumer electronics retailer, is ideally suited to promote products. We believe that growth in emerging markets will be important to Microsoft's performance as it launches a new range of products around its new operating system (OS) and that there is potential to expand upon the partnership with MTS .
Microsoft is creating Windows 8 'Ecosystem Demo Zones' in 20 of MTS' retail stores in Yekaterinburg, St Petersburg and Moscow. The zones are designed to promote new Windows 8 products by allowing customers to experience the new OS with specially trained staff present to help consumers adjust to the new layout and interface . The specialists will also be demoing features of Windows 8 such as synchronising data between devices in the cloud using MTS' mobile network. MTS will also be selling the Microsoft products bundled with MTS data plans in its stores. BMI believes the focus on educating consumers about new features with specially trained staff is a strong strategy that will help uptake of the new OS.
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Although the demo zones will be in just 20 stores, BMI believes there is potential to expand the partnership beyond MTS' flagship stores, albeit in a diluted form. Microsoft and MTS are placing the specialists into flagship stores in high-income urban areas. However, we argue that there may be additional value to be found in rolling out specialists to stores in slightly lower income areas to target the market for first-time buyers of smartphones and tablets. While specialists are required to persuade consumers that are increasingly tied to Google or Apple services to switch to Microsoft products, there is also value in targeting promotion efforts at first-time buyers across part of MTS' network of 4,156 stores (including franchises).
BMI believes that Microsoft would derive benefit from widening its partnership with MTS, and diversifying it to target different consumer segments beyond high-end existing users of smartphones, tablets and notebooks. We also believe that it would benefit from expanding such promotions into other high-growth emerging markets in the Central and Eastern European (CEE) region.
Western European markets remain far higher value than CEE. However, there are reasons that CEE could prove fruitful ground for Microsoft. Firstly, the rates of private final consumption real growth are significantly higher in CEE compared to stagnant incomes and consumer deleveraging in developed markets. Secondly, penetration of smartphones, tablets and netbooks is far lower - which, taken with rising purchasing power, creates a compelling medium-term demand growth story. Finally, this growth in customers includes large numbers buying their first smartphones, tablets and notebooks who will not be tied to an existing OS - a sub-segment of the market in which Microsoft needs to gain traction to help drive uptake of its new OS and devices.
Microsoft undoubtedly faces a significant challenge marketing Windows 8 smartphones, tablets and netbooks against Apple's iOS and Google's Android, which have high penetration rates and well-developed brand presence. However, BMI believes a well-targeted emerging market strategy of product promotion and consumer education could yield significant benefit for Microsoft and help it gain momentum, particularly in the smartphone and tablet markets.