Microsoft’s Narrowed Phone Focus Seen Forcing Exit Down the Line

For Microsoft Corp. even dramatically scaled back plans in smartphones are probably too ambitious.

After writing down almost all the value of the Nokia handset unit the company acquired a year ago and cutting about four-fifths of Nokia's employees, Chief Executive Officer Satya Nadella will refocus on a smaller number of handsets for three groups of people: business users, cost-conscious customers and Windows lovers.

The logic is that Microsoft stays in the phone business in the hopes it can lure a core, smaller group of users -- a niche player. It's the strategy Nadella has run with some success for Surface tablets.

But even that will be a challenge. Apple Inc.'s iPhone and handsets based on Google Inc.'s Android operating system are dominant among the customers Microsoft wants. As for Windows Phone enthusiasts, that group has already proved small.

History is littered with phone makers who tried to recover from market share losses and wound up treading water or sinking deeper, from BlackBerry to Nokia itself, which was once the largest handset manufacturer. Even with Microsoft shifting its focus from trying to be a large player, the more likely outcome is that it continues to lose share, forcing the company to exit the business before too long, analysts said.

"It looks like the curtains are being drawn," Will Stofega, program director at market research firm IDC, said in an interview. He estimates that Windows' mobile market share will go from about 3 percent to zero within a year. "It's not looking good."

Nadella's Commitment

Nadella, in a memo to workers announcing Wednesday's job cuts, pledged to stick with it. "I am committed to our first-party devices, including phones," he wrote.

The company expects to make its own phones for at least the next two years, said a person familiar with Nadella's plans who asked not to be named because the plans aren't public. Microsoft will try to play up its strengths in the markets it has chosen, such as corporate security and collaboration software for business customers.

Instead of trying to sell as many phones as possible, Microsoft will concentrate on three categories: business phones, high-end models and value phones like the Lumia 520, which, at more than 25 million units sold, is the company's best-selling device.

"It isn't abandoning its own devices or Windows Phone yet, but I think that's inevitable," said Jan Dawson, chief analyst at Jackdaw Research.

Fewer Models

Microsoft will release one or two phone models a year in each of the three categories, scaling down a business that now puts out about one model a week if you count all the versions tweaked for different geographies and carriers, said the person familiar with the company's plans. The company also will exit carrier relationships and countries where it hasn't been successful, the person said, although it will continue to sell handsets in the U.S. because of the market's size and significance.

The high-end phones like the Lumia 1020, which customers call "hero devices" will be intended for "Windows' fans who want the very best Windows experience on flagship devices," Terry Myerson, platform and hardware chief, wrote in a memo obtained by Bloomberg. Microsoft hasn't released a high-end phone in the past year.

For Microsoft, it's another massive retrenchment in a business that has shifted the goalposts every two years or so since Bill Gates unveiled a plan to make smartphone software in 2001, well before the market ever appealed to Apple's Steve Jobs or Google's Larry Page.

Nadella is repeating in phones the playbook he used for the Surface tablet -- reduce the target area and try to stand out from the crowd in a smaller field. The narrower focus has helped Surface revenue grow and the product reach profitability, representing a success, albeit with a smaller goal.

"It makes sense, and I think they can sustain it," said Ramon Llamas, a research manager at IDC, said of the new phone plan. "I don't think Microsoft can afford not to be in the smartphone business. They've got to stay with it."

Source: Microsoft's Narrowed Phone Focus Seen Forcing Exit Down the Line