Analysis: Microsoft is Scaling Back on Windows Phone Dramatically

Posted on July 8, 2015 by Paul Thurrott in Windows Phones with 0 Comments

Analysis: Microsoft is Scaling Back on Windows Phone Dramatically

Yes, we were right to be worried about Windows Phone. Satya Nadella’s email only touches on first-party phones for the short term, buying Microsoft time to transition to a “mobility of experiences” future in which it doesn’t matter which phones its customers use.

I published Mr. Nadella’s email previously in Nadella Email to the Troops: Sharpening Our Focus. And you can read the associated press release if you’re looking for more of Microsoft’s take on this news. Here’s what I think.

Windows Phone is failing

Actually, that’s not an opinion, it’s a fact. The company that makes over 96 percent of all Windows Phone handsets in use just wrote off $7.6 billion related to its Windows Phone assets, and has announced plans to dramatically scale back its mobile operations. And, yes, Windows Phone has fallen to just 3 percent market share worldwide too. Things aren’t going well. Sorry.

Phone business restructuring means a total loss from Nokia purchase

Nadella said that Microsoft was “fundamental restructuring” its phone business. This includes an “impairment charge” of approximately $7.6 billion related to assets associated with the acquisition of the Nokia devices and services businesses last year, plus an additional restructuring charge of approximately $750 million to $850 million. When you consider that Microsoft paid $7.2 billion for the only parts of Nokia that mattered (minus HERE), this is a total disaster. Nokia was going out of business. Now only a tiny part of what used to be Nokia remains. And I believe the remainder is on borrowed time.

Microsoft is committed to first-party phones … for the short term only

Nadella stated very clearly that Microsoft is committed to its first-party devices, including phones. (That also includes Surface and Xbox.) That sounds like good news, but there’s a caveat: Microsoft will no longer attempt to “grow a standalone phone business.” Instead, it will “create a vibrant Windows ecosystem that includes our first-party device family.” And that tells me one thing: Nadella has zero plans for Lumia hardware to ever make any money for Microsoft. And that means lots of scaling back.

Here’s how he explains it. (Emphasis added by me.)

“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,” he wrote. “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.”

Fine. But none of that will make any money. What are the long-term plans?

“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.” In other words, even Microsoft’s long-term plans don’t involve its hardware making money.

Let me summarize this even more succinctly: Short-term, Microsoft will make phones. Long-term, Microsoft’s mobile strategy is to push the “mobility of experiences” thing, where it doesn’t matter which devices customers use. Today, Microsoft’s customers are not using Windows Phones. They won’t be in the future either.

Let’s wait and see

Nadella’s email touched briefly on mapping and advertising but like you I couldn’t care less about that stuff. As for phone, I guess we’ll need to wait and see. But here’s what I expect to happen.

Microsoft will cut back on the number of Lumia handsets it makes, a long overdue change. It will wait and see how these new devices perform during the current fiscal year, which runs through June 2016. And it won’t go well: Windows Phone will continue to lose share, and will continue to struggle.

I expect Microsoft to kill Lumia, possibly as soon as mid-2016, and relegate Windows 10 Mobile to third party devices, which can include phones. These phones will never gain any appreciable market share. Tablets will probably continue to do high single-digit or possibly low double-digit market share only for the foreseeable future. The future is the “mobility of experiences,” not Microsoft mobile hardware/phones.

I still love Windows Phone. I desperately want it to succeed. But you can’t get emotional about this stuff. Windows Phone is failing, and has been on a downward trajectory pretty much forever. You can pretend otherwise, but I can’t do that disservice to the community. I can only be realistic. And realistically, things have gone from bad to worse.

If you are a Windows Phone fan like me, relax. Nothing is changing for the short term and we at least have a few flagship devices to look forward to. But keep your eyes and mind open, and pay attention. This ride could be coming to a stop sooner that we had hoped.