Microsoft’s smartphone strategy was not so smart after all. It took too long to develop and never stood a chance in an Android- and iOS-dominated world, analysts told CMSWire on the day the software giant fired close to 8,000 of its phone-division employees.
“Microsoft's mistake was not moving faster to start from scratch on their mobile strategy when the iPhone appeared,” said Frank Gillett, vice president and principal analyst for Cambridge, Mass.-based Forrester Research.
Microsoft CEO Satya Nadella announced in an email to employees today the reduction of 7,800 employees primarily from its phone business. Nadella also announced a $7.6 billion “impairment charge … related to assets associated with the acquisition of the Nokia Devices and Services business.”
The gist? Microsoft smartphone business = failing.
Nadella called the changes part of a “fundamental restructuring of our phone business.” In his email, Nadella also said his Redmond, Wash. company has areas of “potential for growth” and will “partner to drive better scale and results.”
Corporate-speak aside, the numbers tell the story. Microsoft is downsizing 6 percent of its workforce, a little more than a year after it cut 18,000 jobs in its smartphone business.
The news wasn’t shocking, as Nadella said late last month “tough choices” lay ahead.
Nor was it shocking to industry analysts like Gillett, who told CMSWire that Microsoft’s “Windows CE clearly was not succeeding compared to Blackberry and Palm, and the iPhone was transformative beyond those two.”
“Apple clearly established,” Gillett added, “the model for the modern smartphone, and Google imitated the iPhone's innovations well and combined it with the strength of their cloud service offerings. By the time that Microsoft's new phone OS arrived it was too late to gain share with a competent but not distinctively better offering. And they didn't offer differentiation via cloud services or app variety.”
Lagging Behind Android, iOS
Microsoft acquired Nokia late summer of 2013 for $7.2 billion which gave Microsoft a formal lead platform for Windows Phone devices and its future mobile strategy. It set the stage for a battle with Apple, Google, Samsung and others, but the battle never materialized.
Framingham, Mass.-based International Data Corporation (IDC) reported in February Android and iOS owned the worldwide smartphone market in both the fourth quarter and calendar year 2014. According to data from the IDC Worldwide Quarterly Mobile Phone Tracker, Android and iOS accounted for 96.3 percent of all smartphone shipments, up slightly from 95.6 percent in fourth quarter of 2013 and from 93.8 percent in 2013 overall.
Ryan Reith, program director of Mobile Device Trackers for IDC, told CMSWire Microsoft had a two-fold strategy with acquiring Nokia.
He called it a “defensive move” as Nokia was really the only manufacturer at the time shipping Windows Phone. And, Nokia had expressed interest in moving to Android -- which it eventually did, and Microsoft killed.
Microsoft also felt that if it controlled the hardware it could set the example for other manufacturers to follow, Reith said.
“They could design a top-of-the-line smartphone that they felt the industry needed -- with Nokia expertise -- and once it was launched not only would it highlight high-end specs, but also showcase the Windows Phone platform,” Reith said. “Nokia/Microsoft did launch a few great high-end devices, but unfortunately for them it came at the same time when an abundance of OEMs were getting behind larger screen, low-cost Android devices. This created price pressure that was difficult to keep up with regardless of whom it was.”
Microsoft is pulling away from mobile hardware, essentially, because it's not core to its business, according to Richard Edwards, principal research analyst at London-based Ovum Research. But it still, naturally, is investing in mobile software.
“Anyone who's used a Windows Phone will tell you that it's a good user experience,” Edwards said. “However, this matters little if the app you want to use isn't available in the Windows. My daughter can't exist, it seems, without Snapchat.”
Lumia phones make excellent Blackberry replacements for business users, but only app developers can make it a good replacement for an iPhone or Android handset, Edwards said.
“Microsoft should have stuck to a software investment strategy rather than adopting one based on hardware,” he added. “It should have commissioned developers to write Windows Phone apps like it does with Xbox. What it paid for Nokia is a lot of money. Had it spent just 10 percent of this on commissioned apps, it could have brought over a thousand of the most downloaded iOS/Android apps to the Windows ecosystem. It's not too late to start.”
Michael Essery, senior vice president at 451 Research in Boston, told CMSWire that what Microsoft hasn’t discussed is what this means for the OS, “which was getting some traction at least in enterprise.”
“But,” Essery added, “Lumia appears to be destined to a historical footnote.”
What’s Next in Redmond?
According to Nadella, Microsoft is committed to its first-party devices including phones.
“However,” Nadella told employees, “we need to focus our phone efforts in the near term while driving reinvention. 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.”
Look in the near term, he said, for a “more effective phone portfolio, with better products and speed to market given the recently formed Windows and Devices Group.”
“In the longer term,” he added, “Microsoft devices will spark innovation, create new categories and generate opportunity for the Windows ecosystem more broadly. Our reinvention will be centered on creating mobility of experiences across the entire device family including phones.”
IDC's Reith still believes we’ll see one or two more Microsoft high-end smartphones.
“But the real focus within Microsoft,” he said, “should be convincing struggling Android OEMs to migrate to Windows.”