Microsoft Corp. MSFT 2.15 % 's expected launch of new smartphones this week will mark its latest stab at a winning mobile strategy. The new approach boils down to two words: Redefine success.
At a media event Tuesday in New York, Microsoft plans to announce at least two high-end Lumia smartphones designed by the company and powered by its Windows software, according to people familiar with the company's plans. The launch of new premium devices is a bid to generate buzz for Microsoft's latest smartphone effort.
After five years of flailing with Windows smartphones, Microsoft no longer is gunning for the mass market, but grabbing for niches such as businesses, where the company hopes its smartphones will have a competitive advantage.
A linchpin in the plan is Windows 10, the recently released edition of Microsoft's operating system that, for the first time, ties personal computers and mobile devices into a seamless system. Windows users who crunch Excel spreadsheets or make Skype calls on their PCs, the thinking goes, will find it compelling to have the same experience on their mobile devices.
The smartphone do-over is a high-stakes gambit. Microsoft for decades used its Windows franchise to shape the technology industry by controlling the default computing device, the PC. As smartphones take over that role, Microsoft's fortunes will be dimmed without a direct hand in a dominant computing platform.
Microsoft's decision to narrow its focus reflects hard facts: Windows smartphones have sold poorly and bled money. Two years ago, when Microsoft plunged into the smartphone-handset business with an agreement to buy Nokia Corp. NOK 3.44 % 's mobile-phone operation, Microsoft said it would own a 15% smartphone market share by 2018. The company has dropped that ambition. This year, about three out of every 100 smartphones sold will run Windows, research firm IDC estimates. Apple Inc. AAPL 0.73 % 's iPhones and smartphones powered by Alphabet Inc.'s Android software together comprise the other 97%.
Microsoft's phone operation lost 12 cents for each smartphone sold in the three months ended June 30, on average.
In July, Microsoft effectively conceded failure by wiping away about 80% of the value of the $9.4 billion Nokia deal and announcing plans to cut nearly 8,000 workers, mostly in its mobile-phone operation.
Microsoft Chief Executive Satya Nadella has said the cost-cutting measures and decision to stop trying to sell as many phones as possible would help stem losses. Microsoft would operate "more effectively and efficiently with a more focused portfolio" of smartphones, he told Wall Street analysts in July.
Doubters say the company's reduced ambitions are less a choice than a necessity. "They don't have the demand to be big scale," said Mike Walkley, a smartphone-industry analyst with investment-banking firm Canaccord Genuity. "It's almost where they had to go."
Microsoft's defenders say the company has a significant advantage, if it can use Windows 10 to spur interest in Windows smartphones. "Microsoft has a greater opportunity than people realize," said Forrester Research Inc. analyst J.P. Gownder.
Microsoft is betting that shoppers and mobile-application developers will find it alluring to buy Windows smartphones, or write applications for them, in tandem with Windows PCs. To lure app makers who have treated Windows smartphones as an afterthought, Microsoft has made it easier to repurpose their iPhone or Android apps for Microsoft phones.
People close to Microsoft say that success at proliferating Windows 10—the company aims to have it installed on 1 billion devices by mid-2018—would give a huge lift to Windows smartphones. That would likely invert the pattern set by Apple, which found that people who bought iPhones were more willing to buy a Mac computer.
"The best thing for Windows phone devices is Windows 10 use," said a person familiar with Microsoft's strategy.
Microsoft executives hoping for a smartphone turnaround can point to a precedent: the company's Surface line of tablet-plus-PC devices, a once-struggling hardware business that found its groove even without blockbuster sales.
Microsoft got off to a rocky start when the Surface launched in 2012, as it misjudged demand and took a $900 million accounting charge on unsold Surface devices. Recently, Microsoft has won over tech reviewers and some customers to the Surface Pro, a souped-up business version.
Thanks in part to sales of the Surface Pro, which is expected to get a new model in Tuesday's event, the Surface product line pulls in more than $3.6 billion in yearly sales, and revenue no longer lags behind manufacturing cost. Microsoft treats the Surface line as a showcase for new computer or software features, and PC manufacturers have released computers that mimic elements of the Surface.
Even as it rolls out a new bid to become a player in smartphones, though, Microsoft is working on Plan B: making sure its software can succeed even if Windows smartphones don't. Mr. Nadella has stepped up efforts to make or improve iPhone and Android versions of software such as Microsoft Office, the Cortana digital assistant similar to Siri, and the Skype video-calling service.
Write to Shira Ovide at shira.ovide@wsj.com
Source: Microsoft Lowers Its Expectations for Phones
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