Why Microsoft Aims to Cut Back Its Smartphone Business

NEWS ANALYSIS: Windows Phone isn't going away, but Nokia's role as part of Microsoft is effectively over. Microsoft is ending its effort to be on par with Apple.

Microsoft shakeup

Microsoft's announcement July 8 that it is restructuring its phone business is hardly a surprise. The end of Microsoft's long, strange journey into phones was foreshadowed by earlier comments from CEO Satya Nadella. What may have been a surprise was the size of the accounting charge and the size of the resulting layoffs.

The $7.6 billion write-down was nearly the entire value of the Nokia acquisition last year, and the 7,800 employees that are being lost, with a substantial number in Finland where Nokia phones are based, means that Microsoft has essentially killed off the Nokia part of its business. An earlier layoff of around 18,000 employees was also mostly aimed at the phone business.

While there will still be Microsoft-branded Windows phones, the company is dropping its effort to be on par with Apple or Samsung. Instead, the Windows Phone product line will be part of Microsoft's Windows ecosystem, which will include phones but will also include other products, such as Surface tablets.

Nadella explained in an email to employees that Microsoft is planning to move phones into the devices business, and by doing that, would create a more effective phone portfolio. "We plan to narrow our focus to three customer segments where we can make unique contributions and where we can differentiate through the combination of our hardware and software," Nadella said in his email. "We'll bring business customers the best management, security and productivity experiences they need; value phone buyers the communications services they want; and Windows fans the flagship devices they'll love."

In addition to cutting back on the phone business, Nadella said that Microsoft is selling part of its map imaging business to Uber and its display advertising to AOL. The restructuring of the phone business is by far the biggest change Microsoft has announced. It fundamentally alters what Steve Ballmer, the previous CEO, had envisioned for Microsoft.

In addition, the changes to the phone business make it clear that Microsoft is setting its sights on major growth in areas related to business users. This is not to suggest that Microsoft is cutting back on creating and selling products for consumers, because it's not. But what's happened is that Nadella has recognized that the company is never going to compete with Apple and Android phones, and that spending money in a vain attempt to be like Apple is a silly idea.

Instead, Windows phones will become part of the overall Windows 10 ecosystem that includes tablets and desktop computers as well as laptops and other devices that can run Windows. The idea is to have a common interface and a common code base, allowing Microsoft and its customers to have something approaching a more seamless experience across the range of platforms.

It also means that Microsoft is now taking on BlackBerry in a head-to-head battle. Both companies are aiming at the same customer base; they're going to try offering similar devices to solve similar problems. And while that may make it seem like BlackBerry is toast, that would be wrong.

Wayne Rash

Wayne Rash

Wayne Rash is a freelance writer and editor with a 35 year history covering technology. He’s a frequent speaker on business, technology issues and enterprise computing. He covers Washington and...