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Microsoft's sale of feature phone biz erodes smartphone commitment

Gregg Keizer | May 19, 2016
Sells the bare-bones feature phone part of the disastrous Nokia deal for US$350 million.

Phone hardware revenue was down 47% year-over-year.

How Microsoft explained the sale caught the eyes of analysts, particularly the omission of any statement of confidence in the Lumia line of smartphones, which continue to represent the vast bulk of Windows-powered phones.

The lapse made Dawson question Microsoft's vow to stay in the business. "It does seem odd that Microsoft didn't commit to launching smartphones in [the] future in this press release," Dawson said. "That suggests that there's at least some uncertainty about whether Microsoft continues to be committed to making smartphones."

Dawson left Microsoft a small window of opportunity. "[Microsoft's comments] fit with reports that we might see a Surface phone in 2017," he said, referring to rumors that Microsoft will double down on the Surface brand with a phone to match its tablets and 2-in-1s.

For its part, Microsoft said only that it would "continue to develop Windows 10 Mobile and support Lumia phones such as the Lumia 650, Lumia 950 and Lumia 950 XL, and phones from OEM partners like Acer, Alcatel, HP, Trinity and VAIO." But it was silent on any future Lumia models, and less surprisingly, didn't say anything about a Surface phone far down the road.

Carolina Milanesi of Creative Strategies had a somewhat similar take to Dawson. While she was expecting Microsoft to exit the smartphone hardware market entirely, she contended that the rumored Surface-branded phone might be positioned much like the original Surface and Surface Pro tablets: as a design benchmark to strut the capabilities of Windows 10 Mobile.

"Anyway, there are different ways to skin a cat in getting consumers," Milanesi argued, ticking off Microsoft's cross-platform apps for iOS and Android, and the services it's pitched to all comers, like OneDrive and Office 365.

Microsoft never seemed that enthusiastic about feature phones, although it did position them as a gateway to more expensive, expansive smartphones. As part of Ballmer's initial strategy, feature phones were to lead at least some consumers from those bare-bones devices to more sophisticated, if still inexpensive, smartphones. And from there to Microsoft's services portfolio, where they could be monetized.

That didn't pan out, perhaps because the approach was more an ex post facto rationale of the Nokia deal than a viable plan.

"Microsoft took the feature phone business [from Nokia] because it was only offered an all-or-nothing deal by Nokia," said Dawson. "It then had to justify acquiring a business that had no connection to the rest of Microsoft, hence the funnel rationale. But it always seemed like a stretch, and that's been borne out in reality."

"When they did the deal, there was some value to feature phones," said Milanesi. But that turned out to be a mirage, as very-low-priced smartphones from smaller manufacturers, many of them feeding local markets in the People's Republic of China, India and elsewhere in Asia, flooded the market.


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