Smartphone Division Layoffs Clouds Microsoft's Windows Phone Strategy

Last year, Microsoft announced its intention to cut 18,000 jobs from the company, half of which would come from the smartphone division it purchased from Nokia. That number has slightly changed, as Microsoft announced that it's going to cut 7,800 jobs from that division as part of its restructuring of the smartphone business under new CEO Satya Nadella.

The company will also write off the $7.6 billion it spent acquiring Nokia and other related assets, and another $750-$850 million will be spent for the restructuring process alone. The news comes weeks after the company decided to get out of the ad display business, which it sold to AOL.

Microsoft doesn't seem to have much faith in its ability to turn Windows Phone around in the future, as evidenced by the fact that it announced this only months before it would get a chance to see how its Windows 10 unification strategy between desktop and phones would work.

Although Microsoft will continue to make its own Windows phones, the business will be significantly scaled back. Letting go of the $7.6 billion investment in the mobile business also suggests that Microsoft won't be too aggressive in its mobile strategy in the near future.

The company will keep building phones for the low-end, for business customers, and for enthusiasts who want high-end flagships, with a new plan of possibly releasing only three phones per year.

Nadella further discussed the company's future plans in the mobile space in a letter:

“In the near term, we will run a more effective phone portfolio, with better products and speed to market given the recently formed Windows and Devices Group. We plan to narrow our focus to three customer segments where we can make unique contributions and where we can differentiate through the combination of our hardware and software. We'll bring business customers the best management, security and productivity experiences they need; value phone buyers the communications services they want; and Windows fans the flagship devices they'll love.In the longer term, 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."

Without too much investment in Windows phones, and considering Nokia made the vast majority of Windows phones on the market, it's not clear where this leaves Microsoft in mobile. The company's mobile market share could shrink rapidly unless Microsoft can convince other companies to build more Windows Phones as it scales back its own handset manufacturing.

Nokia adopted Windows Phone instead of Android, hoping it could differentiate itself in the market, but instead it ended up marginalizing itself from users who were already used to Android and iOS and their much larger ecosystems of apps.

Nokia ended up making the bulk of Windows Phones, but when the devices were only a sliver of the larger smartphone market, that achievement didn't mean much. Nokia also couldn't sustain itself anymore due to the losses in revenue in the market, so Microsoft ended up buying the phone division in order to keep it alive.

It appears that this strategy hasn't worked, as we can see from the big layoff numbers and the $7.6 billion "impairment charge" (as Microsoft called it).

Microsoft's shrinkage in the smartphone market could also have a negative effect on its PC business, as competitors have begun to adopt integration strategies between their smartphones and PCs. The competitors are stronger in mobile, but weaker in PCs; however, an increasing number of people use smartphones as their primary computing device, which puts Microsoft in a disadvantageous position compared to competitors such as Apple and Google.

Right now, it's not clear whether the recent layoffs will also affect the Surface business. The Surface struggled when it first hit the market, but the situation seems to have improved with the more recent models.

Microsoft's new CEO may be more focused on the cloud and software side of the business than on hardware, especially if Microsoft ends up alienating its partners by making its own devices. Nadella's strategy should become more clear over the next year, after the launch of Windows 10.

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