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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Lucian Armasu
Lucian Armasu is a Contributing Writer for Tom's Hardware US. He covers software news and the issues surrounding privacy and security.
  • salgado18
    No, silly. They want to have fewer products, but higher quality ones. A large lineup is a great way of making every device just another one, while focusing on one good phone creates a better image of it. Imagine having low-end, mid-range, performance and entusiast versions of the Xbox One, it would be a mess to customers and branding.

    In short, they are taking the Apple route: one phone, one name, one experience.
  • FlayerSlayer
    They did that, actually:
  • salgado18
    They did that, actually:
    But all of them are Xbox 360's inside. The experience is the same. They work just like an iPhone 5S, for example, with 16GB, 32GB and 64GB versions: still an iPhone 5S, just different storage.

    Compare that to the differences between the Lumia 435, 540, 640, 640XL, 735, 830, 930, etc... (not even counting earlier models still on sale)

    I think it makes perfect sense: some people want cheap but good, some people want power, some people want practical. Lumia Home, Lumia Pro, Lumia Ultimate, easy to pick from. And you need less people to make them.
  • homeskooldalien
    They did that, actually:
    With the Xbox 360 there was never any difference performance wise. The different models has cosmetic changes and different storage amounts. I will say that there was a hardware change in the Xbox 360 S that made the CPU/GPU run more efficiently (aka cooler) but the hardware was identical as far as functionality and performance in game. If a console company made different performing models (aka low-end, Mid-Range, and High-End) you would see A LOT of developers stop producing games for that console due to having to code for 3 different hardware configurations instead of just one. Can you imagine there being an Xbox (doesn't matter what generation) that would run a game at half the frame-rate or half the quality graphics as other models. People wouldn't buy those models period, at least I wouldn't. Just my 2 cents.
  • Silverking
    Hmmm.. Basic math fail? If half of 18,000 is 9,000 then only laying off 7,800 from the phone division is saving 1,200 jobs originally getting axed.
  • hannibal
    Yep. 3-5 models is enough! Maybe even 7...
    - High end small and big
    - Middle range small and big
    - Low end small and big
    - One huge phablet with high end specks
  • ohim
    That moment when a company cuts jobs to save money and at the same time give CEO`s wages that could cover all those people`s wages ..
  • wemakeourfuture
    MSFT has never had real great success making phones overall. This is their 3rd decade in mobile and they're a gigantic flop. It would never work, even if they concentrate on a single phone it will flop. Their tablets flopped. Their music player flopped. You guys may brag about their Xbox but over the course of Xbox entire lifespan its barely been a worth while business venture compared to Sony who have made billions of Playstation. Not to say Sony is a great company but just putting Xbox in its place.

    Overall MSFT has almost made 85-90% of its profit from basically two products, Windows and Office and everything else has been a flop or non-game changer.

    They can't do hardware, they can't do mobile, they cannot compete with Apple even with a single phone.
  • falchard
    I think there is some wisdom in this. Microsoft has answered 2 of its biggest issues in smart phones. 1) Less saturated market place - Corrected to a degree in Windows 10 by allowing easier porting of Android and iOS applications. 2) Alienating hardware vendors by being a competing vendor.
  • Reaver192
    This is brilliant on Microsofts part and they are probably going to start actually building phones with nice hardware. The key for them will be to bring some first to market hardware advances like Apple does. If you have something thats cool that no one else has it will make others want it. However I will say Microsofts marketing division is horrible in my eyes. They need a new image and the stupid commercials with idiots playing their Microsoft Surfaces the way homeless people play drums on buckets in the street while dancing isn't gonna cut it. They need something slick and interesting. Something that people see and say, WOW that is really cool and thats the only one that can do that. Hopefully they have something big up their sleeves for Windows10 with integration, Like Remote Desktop from my phone would be phenomenal. Let me use the processing power of my home pc(just like using a enterprise cloud based application) straight from my device. I wanna pick up on my phone where I left off and my pc and have it work great. Give me a Note4 sized device and an s-pen to do it and Im sold. Ill thrown my S6 in the trash and switch on the spot if it works well.