NOK Nokia Corp

By Jay Greene and Matthias Verbergt 

Ten months after writing down much of its disastrous acquisition of Nokia Corp.'s handset business, Microsoft Corp. took another step to unwind the deal.

Microsoft on Wednesday agreed to unload its low-end phone business, acquired from Nokia, to FIH Mobile Ltd., a subsidiary of Hon Hai/Foxconn Technology Group, and HMD Global Oy for $350 million. In a separate but related transaction, Nokia entered into licensing pacts with FIH Mobile and HMD Global to put its brand once again on mobile handsets.

The deal highlights how sharply Microsoft Chief Executive Satya Nadella has shifted the company's mobile strategy since his predecessor, Steve Ballmer, championed the Nokia deal, which closed in 2014. Last summer, Microsoft wrote down about 80% of the $9.4 billion deal, cutting 7,800 workers, mostly in its mobile-phone business. The software giant hasn't given up on phones. But its latest strategy revolves around Windows 10, the most recent version of its flagship operating system that runs on various devices including smartphones, PCs, tablets, and game consoles.

Microsoft also is developing services that behave intelligently based on data gathered by smartphones and other devices. At a conference for software developers in March, the company showed how its voice-activated digital assistant, Cortana, could book a hotel room or order a pizza proactively based on a user's personal data and preferences.

The low-end phone business that Microsoft sold on Wednesday doesn't fit with that strategy. The entry-level phones known as feature phones lack the computing horsepower to run Windows 10. "The future [of Microsoft's mobile business] has to lie with Windows 10," said J.P. Gownder, a Forrester Research Inc. analyst.

A Microsoft spokesman said the company is "committed to a vibrant Windows Phone market" and that it will continue to develop Windows 10 for mobile devices. The company also will invest in mobile security and management features.

Feature phones, though, are the one area of the mobile-device market that Microsoft leads. The company shipped 15.7 million feature phones world-wide in the first quarter of 2016, ahead of Samsung Electronics Co., which shipped 13.1 million entry-level phones, according to IDC Research Inc.

But Microsoft isn't well suited to squeeze profit from feature phones, which produce thin margins, Mr. Gownder said. Foxconn, by contrast, has the manufacturing scale to eke more efficiency from the business.

For Nokia, the deal is a re-entry into the handset market after the company, once the leader in mobile phones, refashioned itself into a maker of wireless and Internet network equipment. The Finnish company said it is hoping to capitalize on its brand name in developing countries starting with entry-level phones.

It plans to offer higher-end smartphones and tablets later.

Nokia said it had granted patent and design rights to HMD Global, a newly created company based in Finland that will be in charge of global marketing through a 10-year exclusive agreement. HMD is majority-owned by a private- equity fund managed by Jean-François Baril, a former Nokia executive. Nokia said it had signed manufacturing agreements with a subsidiary of Foxconn, the Taiwanese company and main assembler of Apple Inc.'s iPhones.

Microsoft's sale of the feature phone business is Mr. Nadella's latest retrenchment after the failure of Mr. Ballmer's repeated efforts to build a smartphone business.

The company's effort was launched in 2003 under the banner of Windows Mobile, a mobile-operating system designed for business customers.

That campaign sputtered as BlackBerry Ltd., and later Apple's iPhone and phones running the Android operating system, seized the market.

Microsoft shifted its focus to consumers in 2010, debuting the Windows Phone operating system. However, that initiative failed to gain a significant share of burgeoning smartphone sales.

Since becoming chief executive, Mr. Nadella has trimmed the company's device lineup, released versions of popular Microsoft applications for Android and iPhones, and reverted Microsoft's focus in phones to business users.

Nonetheless, Microsoft's share of the world-wide smartphone market slid to 1.1% in the fourth quarter of 2015, according to Gartner Inc.

Its success in raising that number will depend on putting Windows 10 on as many devices as possible, including smartphones, personal computers, laptops, and its Xbox game consoles.

Microsoft is betting that a huge base of Windows 10 users will convince developers to create must-have apps and lure mobile customers to the platform. The operating system, released last summer, runs on 300 million active devices by the latest count.

As part of Wednesday's sale, FIH Mobile also will acquire Microsoft Mobile Vietnam, which runs the company's Hanoi, Vietnam, manufacturing facility. The operation's roughly 4,500 employees will transfer to, or have the opportunity to join, FIH Mobile or HMD Global, according to Microsoft.

Write to Jay Greene at Jay.Greene@wsj.com and Matthias Verbergt at Matthias.Verbergt@wsj.com

(END) Dow Jones Newswires

May 19, 2016 02:49 ET (06:49 GMT)

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