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Microsoft gives Windows phones one last shot

Gregg Keizer | July 13, 2015
But analysts see the US$7.6B write-off as a step toward an inevitable exit from mobile hardware.

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Microsoft will continue to manufacture smartphones for its Windows 10 Mobile operating system, but the company has thrown in the towel on the devices strategy pursued by its former CEO and will probably give up entirely unless Windows 10 reverses years of missteps in mobile, analysts said.

After Microsoft wrote down $7.6 billion of its investment in Nokia and again reorganized, it will turn to a revamped, two-part strategy, one piece older, the other relatively new, the experts argued.

Microsoft's smartphones will follow the trailblazing of the more successful Surface tablet line, which after two years with little return hit its stride in 2014 with the debut of the Surface Pro 3. "We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem that includes our first-party device family," CEO Satya Nadella told employees in an all-hands email Wednesday [emphasis added].

In plain English, the Lumia line will be relegated to a peripheral position -- the spot the Surface Pro 3 now occupies in comparison to the broader personal computing device market and best exemplified in smartphones by Google's "hero" Nexus handsets.

"Microsoft will have something very similar to where the Surface line is now," said Patrick Moorhead, principal analyst at Moor Insights & Strategy, in a Friday interview. "The idea will be to create inspiring hardware that motivates their ecosystem. They'll go after the 'halo' effect."

The second piece of the strategy kicked off more than a year ago when Nadella began a push to bring his company's services and software to the mobile platforms that matter: Android and iOS.

It's not over, yet

Windows phones will not disappear. Not yet. "I am committed to our first-party devices including phones," asserted Nadella, showing that, at least for now, Microsoft won't scrub Windows smartphones from its portfolio.

The reality, however, is stark: Even with billions poured into mobile, Windows powered just 2.7% of the handsets shipped worldwide last year, down from 3.3% in 2013, according to IDC. And because Microsoft was responsible for more than 95% of all Windows smartphones in 2014, a pull-back by the firm means there's little chance of changing the OS's fortunes.

Analysts have zero confidence that other makers will step up to fill the hole.

"Microsoft owns 95% of the business, and I don't see that changing," said Jan Dawson, chief analyst with Jackdaw Research, in an interview Wednesday. Although Microsoft made much last year about bringing in new partners -- in China and India -- that talk has gone quiet. Others, such as Samsung and HTC, have shown little interest in boosting their Windows line-ups. "Why would anyone get into [the Windows smartphone] business?" Dawson asked.


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