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.
Why Microsoft Aims to Cut Back Its Smartphone Business
For Microsoft to compete successfully against BlackBerry, it has to acquire, one way or another, the level of security and secure services that BlackBerry has spent years building. In addition, Microsoft would have to develop the global relationships BlackBerry has in place that serve it well in difficult times.
And it’s worth noting that in those cases where Microsoft and BlackBerry have gone to battle, BlackBerry has been winning. The biggest recent case is in automotive electronics, where BlackBerry has just ousted Microsoft in Ford’s Sync infotainment system. In that area, Microsoft has been plagued with substandard quality and operational problems for years.
While it’s true that phones and automotive electronics aren’t the same thing, it’s also true that they’re not that much different in some ways. What’s also true is that Microsoft has a tough row to hoe in convincing enterprise users, both corporate and governmental, that they have a solution that goes beyond what BlackBerry, Apple and Android can offer.
While the Windows 10 ecosystem is a powerful weapon, it’s only one weapon. When Nadella says the company needs to focus its attention on the short term, he’s saying that he needs to find a way to make Microsoft’s devices relevant again. This will mean making the Windows experience much more complete than it is today, and to offer the experience on mobile devices in ways that are much more compelling than they are currently.
But Microsoft still has to find a way to convince business users to adopt whatever Windows phones become in the future. The company is promising a new series of business apps for Windows phones, including the new Skype for Business Windows Phone app, which is replacing the business communications utility Lync. But there needs to be more than just apps.
One of Microsoft’s challenges is the lack of good apps for business, and while Microsoft does have some, competitors have many more. Microsoft also has to find a way to convince the enterprise world that it has security at least as good as Apple and Android. Regardless of how good Windows Phone is, the perception is that security isn’t a strong point. Perhaps, instead of major acquisitions such as the Nokia buyout, it’s time for some partnerships, perhaps joining with BlackBerry for security.