Microsoft Restructures Amidst Nokia Flop

Microsoft is likely feeling buyer's remorse today as the Windows operating system maker announced plans to cut 7,800 jobs, mainly from its phone business, and write off $7.6 billion over its acquisition of Nokia.

The restructuring comes just weeks after Microsoft Corp. (Nasdaq: MSFT) announced a shake-up of its executive team, including the ousting of former Nokia CEO Stephen Elop, who was credited (or blamed) for Microsoft's $7.2 billion acquisition of the handset maker. Microsoft also recently sold its imagery acquisition operations to Uber and display advertising business to AOL. (See Elop's Out as Microsoft Refocuses Its Strategy.)

Today's restructuring of its phone hardware business is a continuation of new CEO Satya Nadella's plan to "better focus and align resources." As a result of the 7,800 planned job cuts, it will record an impairment charge of approximately $7.6 billion, in addition to a restructuring charge of between $750 million and $850 million. The job cuts come on top of the 18,000 positions Microsoft announced it would eliminate last year. (See Expect Further Cuts at Microsoft Devices – Analyst and Microsoft to Axe 12,500 Ex-Nokia Employees.)

"We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem including our first-party device family," Nadella said in an email to employees. "In the near-term, we'll run a more effective and focused phone portfolio while retaining capability for long-term reinvention in mobility."

For more on mobile device and operating system strategies, peruse the dedicated mobile content channel here on Light Reading.

The news may look grim for the future of Microsoft as a smartphone maker, but Jackdaw Research Chief Analyst Jan Dawson, who covers the smartphone space, says it's not the last we've heard from Microsoft -- at least not yet.

"I feel like this still isn't the final outcome for the Microsoft devices business -- the business unit will still exist, and will still churn out phones, but it'll be smaller, leaner and more focused," he writes in an email to Light Reading. "The big question is how long it takes before Microsoft decides to abandon this business altogether."

Microsoft has made a big deal of Windows 10 as the one operating system for all devices, including PCs, tablets and smartphones. Considering that its own devices make up 95% of all Windows Phone devices on the market today, Dawson says, abandoning its phone business would basically kill off Windows on mobile.

That said, Android and iOS are doing a pretty good job of killing Windows Phone on their own. Dawson points out that Microsoft has really only found success in phones at the low end of the market, which isn't a sustainable business plan.

"The good thing is that Microsoft is clearly working hard on an alternative mobile strategy at the same time, rather than putting all its mobile eggs in the Windows Phone basket," Dawson says. "It's developing lots of apps, including some really good ones, for iOS and Android, so that if it does have to abandon Windows Phone, it will at least still have a foothold in the mobile business."

Microsoft plans to share more information on the restructuring and its new strategy on its fourth-quarter earnings call on July 21. The company's stock was up slightly, by 0.27% or 0.12 points, to $44.42 on Wednesday afternoon.

— Sarah Thomas, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editorial Operations Director, Light Reading

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James_B_Crawshaw 7/9/2015 | 12:47:52 PM
Re: Phone profitability Apple's manufacturing is outsourced. Everyone has access to the same EMS companies and the same component suppliers. They do have their own processor but those of QCOM are just as good and of course both of them are manufactured by foundries. 

Obviously if you are selling millions of phones you will get a better per unit price from EMS and component suppliers than if you are selling thousands. But Nokia was selling much larger volumes than Apple and Samsung continues to do so but no one can match Apple's profit margins because no one can charge the premium for nice design that Apple can. 
Gabriel Brown 7/9/2015 | 12:45:36 PM
Re: Phone profitability What James said. At one time Nokia was lauded for its supply chain efficiency and this was seen as a major advantage and a barrier to entry for new competitors. It didn't quite work out like that. To extend the analogy, it's the orange that matters when you're making juice, not the fancy juicer.

Overall, the Nokia mobile phones business has been a massive screw-up. Ouch!

And I say that as an erstwhile fan with drawer of old Symbian (and Windows!) smartphones...
mhhf1ve 7/9/2015 | 12:38:22 PM
Re: Phone profitability Apple's supply chain must contribute a little to its profitablity, right? Sure, Apple charges a premium for its products, but its costs are part of the profitability equation. Nokia and Msft (and others like the Amazon fire phone) are struggling to sell their phones without a loss -- which might be a bit easier if their costs were lower.
James_B_Crawshaw 7/9/2015 | 12:09:26 PM
Re: Phone profitability Apple's supply chain and outsourced manufacturing process is not what makes them profitable. They charge a premium because their phones are nicer to use than everyone else's. Nokia had greater economies of scale in purchasing and manufacturing than anybody but in the end they couldn't give their phones away because they weren't as much fun to use as iPhone and Android. 
mhhf1ve 7/9/2015 | 11:11:09 AM
Re: Nokia's IP It'll be interesting to see Nokia making phones (or at least designing them) again -- and find out if Nokia can regain significant market share. Nokia might be able to mimic Apple's supply chain model and make phones more efficiently than it once did. In hindsight, it seems strange to think that Msft could compete when it bought a less profitable company's manufacturing process to do so.
mhhf1ve 7/9/2015 | 11:04:41 AM
Re: ouch Exactly. Msft somehow missed the boat entirely for mobile phone OSes. Now it's far too late for them to be anything more than third place unless apple really messes up. Android is open source, so it will be difficult to displace due to the sheer numbers of devices and manufacturers using it. Android's only Achilles heel is that it can be forked -- and it's being formed by Amazon and Msft separately.
mendyk 7/9/2015 | 9:45:41 AM
Re: ouch Your reference to the 20th and 21st centuries is the key point. Microsoft "controlled" the PC era without making hardware. It was and remains the de facto operating system for PCs. With mobile devices, it will never be close to having de facto rule. The idea of salvaging its mobile OS play by linking it to its PC-based product is sort of like Arnold doing another Terminator movie at age 67 or so. Yes, you can squeeze a little more juice out of the pulped orange, but not nearly enough to fill the glass.
James_B_Crawshaw 7/9/2015 | 5:29:38 AM
Re: Nokia's IP Nokia didn't sell its IP portfolio to MSFT. Google bought MOT for the IP in order to provide it with more firepower in patent litigation. I think they have now realised patent litigation is a bit more complicated than just looking at who has the bigger list of patents. Nokia was smart to not sell its IP to MSFT. Also smart to keep the maps business which they seem close to selling to a consortium of car makers though for much less than they originally paid for it. 

Is there a pattern here? Acquire, writedown, dispose ... repeat. 
mhhf1ve 7/9/2015 | 2:47:04 AM
Re: ouch Google's experience with Motorola is entirely different bc Google retained valuable patents and IP to protect Google from some nasty lawsuits. Microsoft didn't need Nokia's IP -- and seems to have sold it off already.
lanbrown 7/8/2015 | 11:19:36 PM
Re: ouch But Elop is the one that started the burning platform.  Before his "memo" Nokia was still seeing double digit growth in the smartphone market.  After the memo, is when the platform started burning.  If he wanted to make the shift he did, there were better ways to do it.  He basically left customers no choice but to leave.  Then the ones that stayed were rewarded with a phone that couldn't run the next update.


Look at the work history of Elop.
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