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Microsoft shrinks smartphone ambitions with mobile restructuring

Blair Hanley Frank | July 9, 2015
Translation from corporate speak: The Nokia acquisition has been an extremely costly disaster.

Microsoft CEO Satya Nadella just unveiled the latest of the "tough choices" Microsoft is making to streamline its business, and it's a doozy: the company is significantly cutting back its smartphone ambitions almost two years after announcing it would acquire Nokia's Devices and Services business in an attempt to play a greater role in this market.

In an email to employees, Nadella said that the company was moving away from being a phone manufacturer and towards creating a "vibrant Windows ecosystem" that includes a group of first-party devices. As a result, the company will be dismissing around 7,800 employees, with the majority of job cuts impacting people in Microsoft's phone hardware business. The restructuring also included another aftershock from the Nokia acquisition: Microsoft will take a massive $7.6 billion write-down on the acquisition itself along with a restructuring charge of between $750 and $850 million.

The company's smartphone plans for the near future appear reminiscent of its current approach to the Windows tablet market. Microsoft makes the Surface and Surface Pro devices while simultaneously encouraging third-party manufacturers to create their own Windows tablets. By contrast, the smartphone division responsible for carrying on the Lumia brand that Microsoft acquired from Nokia has been producing a wide variety of devices across multiple different form factors.

Nadella said in his email that Microsoft will focus on three key smartphone markets going forward: Business users, buyers of value phones  and people who want flagship Windows devices. Microsoft is rumored to be developing a pair of flagship Windows handsets that will be released around the same time as Windows 10 Mobile, and Nadella's statements today seem to imply that those plans remain on track. It's not clear how many other devices the company will produce to serve those markets, or if the flagship phones are supposed to serve customers across all three markets.

However, Microsoft's broader smartphone strategy seems a good deal murkier. Two top Nokia executives who joined the company with the acquisition -- Devices and Services head Stephen Elop and smartphone chief Jo Harlow -- left the company last month as Executive Vice President Terry Myerson gained control of Microsoft's devices efforts in addition to his role guiding Windows development. The changes today make it clear that Microsoft won't be producing the same wide swath of Windows smartphones it has in the past.

It remains to be seen what that will do to the overall Windows Phone market. Microsoft purchased Nokia to promote development of new Windows Phone hardware, and scaling back its efforts in that regard means that the company is more beholden to other manufacturers to drive forward the hardware market for its smartphones. That's a major risk, since most manufacturers only offer one or two Windows Phone handsets -- if they sell any of them at all.


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