Did you know Microsoft makes smartphones? It does! However it shouldn’t anymore.
It has been almost two years since Microsoft become a smartphone company by buying pieces of moblie phone pioneer Nokia. The $US9.5 billion deal was Steve Ballmer’s 137th attempt to make Microsoft relevant in consumer computing beyond PCs.
Before then, Microsoft’s smartphone strategy was similar to Google’s tactics with Android app. Microsoft made a version of Windows software that it licensed to handset specialists such as Samsung laptop. Almost no one bought Windows phones.
The idea behind the Nokia deal was to borrow from Apple’s business model. If Microsoft took control of Nokia’s capabilities in making smartphones and combined them with Windows software, the company would have a better chance to find a foothold in mobile. Or so the thinking went.
To almost everyone, buying Nokia to go big in the smartphone business seemed like a bad idea from the start. It makes even less sense now.
Microsoft on Thursday disclosed it sold 2.3 million of its Lumia-branded smartphones in the three months ended March 31. That works out to an average of roughly 26,000 each day of the quarter, worldwide. General Motors sold more vehicles during the same period, and cars and trucks cost a bit more than phones. Microsoft has a 2 per cent share of the smartphone market – less than it had before the Nokia takeover.
Small sales aren’t wholly unintentional. Microsoft chief executive Satya Nadella decided last year to target Microsoft smartphones at niche markets including business users and Windows fanboys, and to stop trying to make them a mass-market product. That wasn’t so much a strategy shift as a recognition that Windows smartphones weren’t selling in masses.
Nadella inherited a Nokia deal he initially didn’t like. But Microsoft is squarely his company now, and it’s time for him to quit wasting executive attention and shareholder money tilting at smartphone windmills.
The smartphone business has been all headaches for Nadella, with little strategic promise down the line to compensate for the pains. For a time, Microsoft was losing money on every smartphone it made before the devices even left the factory. Just months after he took the CEO job, Nadella had to fire 12,500 people hired from Nokia, then he fired thousands more the next year – the equivalent of Alaska Air’s workforce – to get the company’s smartphone business to barely break even. Microsoft’s accountants decided the inherited Nokia parts had declined in value by $US7.6 billion, triggering a charge that dragged Microsoft to its largest loss ever.
The tiny number of users who own Windows smartphones know they’re actually pretty good. But Microsoft should know the quality of a product doesn’t guarantee computing dominance. Microsoft has long been caught in a chicken-and-egg smartphone problem. Small sales numbers mean few companies make apps for Windows phones, which makes the phones less appealing, which holds down sales, which makes companies like Snapchat and Uber less likely to build Windows phone apps, or to treat them as low-priority projects when they do.
Microsoft’s solution has been to wait until next year. And then the next year. And the next. It makes sense in theory this time. With the latest version of Windows, it is easier to reuse software that developers are making for Windows computers for Windows smartphone apps. But success is far from guaranteed. And then what? Windows smartphones will have more apps, but they will still have to compete with a zillion Android phones and iPhones in a smartphone market in which growth is all but gone.
Of course, the history of Microsoft is a lesson in the value of persistence. Microsoft spent billions of dollars on businesses like Xbox and Bing, and in hindsight those investments were worthwhile. Microsoft stuck with what seemed like a bad idea with its Surface laptop-slash-tablet, and it morphed from a silly idea into a nice business with technology that has been copied by Apple. The path to success is much harder in smartphones.
The phone business is almost immaterial financially, at less than 4 per cent of Microsoft’s revenue. The company has enough money to keep spending forever on smartphones and see if they catch on. But that’s not the Microsoft Nadella says he wants. He has ditched other projects – such as a digital mapping initiative, entertainment programming for Xbox and a Web banner ad operation – that weren’t essential, so Microsoft could focus on what it does best.
More importantly, Nadella has doubled down on making its consumer and business software like Office work great on other companies’ smartphones. The success now means Microsoft should pull down the curtain for good on its homegrown mobile devices. RIP, Windows smartphone. Nearly no one will miss you when you’re gone.