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Microsoft eats another US$1 billion as phone strategy shrinks to enterprise-only

Gregg Keizer | May 27, 2016
Consumer-play dead to Microsoft, which will focus remaining hardware goals on corporate.

Microsoft's announcement yesterday that it would eat nearly $1 billion and lay off another 1,850 workers, three-quarters of them from its phone division, prompted analysts to call the company's consumer smartphone business dead, deceased, departed.

They agreed that Microsoft's only remaining shot at phones is the enterprise, probably with a "Surface"-branded model that apes the Surface Pro as a design benchmark that struts Windows' capabilities.

"They've discarded consumer," said Patrick Moorhead, principal analyst at Moor Insights & Strategy, in an interview. "They just tossed out the Windows fan. It's now all about business."

Moorhead and others based their opinions on statements made in mid-2015 by CEO Satya Nadella, who spelled out three markets for Microsoft's smartphones after he announced a retrenchment and a massive $7.6 billion write-off for the failed acquisition of Nokia under his predecessor, Steve Ballmer.

Those markets: value-oriented buyers, Windows loyalists and business customers.

Last week, Microsoft abandoned the low-end market when it sold what was left of its feature phone business for $350 million to FIH Mobile Ltd., a subsidiary of Taiwanese contract manufacturer Hon Hai, better known as Foxconn, and to Finnish firm HMD Global. Previously, Microsoft had cast the feature phones as gateways to the more expensive and advanced Windows-powered smartphones.

Microsoft will take a charge of approximately $750 million against its phone business earnings in its Q2 financials at the end of June, and set aside another $200 million to cover severance for the laid-off workers. The addition of another write-down brings the bill for the Nokia disaster, initiated by Ballmer in September 2013 and finalized in April 2014, to nearly $11 billion in charges, restructuring fees and severance payments.

The total was more than that, said Jack Gold, principal analyst at J. Gold Associates. "It goes back much further than Nokia," Gold said. "They were investing $1-to-$2 billion a year in Windows Phone for years. So the overall amount is much higher. But it's not going to hurt Microsoft. It's not going broke."

Still, Microsoft's once-professed smartphone strategy is in tatters.

Microsoft didn't say that, of course. But it did acknowledge that the accumulated write-downs and layoffs put it in a tough spot. "Our phone success has been limited to companies valuing our commitment to security, manageability, and Continuum, and with consumers who value the same," wrote Terry Myerson, the executive who runs Microsoft's combined devices and operating systems division.

"We need to be more focused in our phone hardware efforts," Myerson added, not the first time the Redmond, Wash. company's leaders have said that.

Nadella echoed Myerson. "We are focusing our phone efforts where we have differentiation -- with enterprises that value security, manageability and our Continuum capability, and consumers who value the same," Nadella said in a Wednesday statement.


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