By Shira Ovide
Microsoft Corp. tried for years to crack the mobile market by
retooling its software, replacing several executives and spending
billions of dollars to acquire a hardware business. On Wednesday,
the Redmond, Wash., giant acknowledged it will try yet another
approach.
The admission was a harsh one for its investors and employees:
It is writing down about 80% of the $9.4 billion deal for Nokia's
handset business, and will cut more than 6% of its global
workforce--mostly in its mobile-phone operation--a year after an
earlier round of job cuts to the business.
The twin blows are an embarrassing reminder of Microsoft's
inability to find a foothold in the smartphone industry after more
than a decade of strategy zigzags and billions of dollars of
investment. The trends that put a personal computer in nearly every
pocket or purse, more than any other technological shift in the
past decade, have eroded Microsoft's former position at the center
of computing.
A Microsoft spokesman declined to comment.
Chief Executive Satya Nadella, who disclosed the moves in an
email to employees, said Microsoft will remain in the mobile
business, but offer fewer models and follow a less ambitious road
map. Its road ahead will focus on business customers, Windows
software devotees and those looking for cheap smartphones.
Microsoft was among the early entrants in the smartphone
business with its Windows Mobile phone software released in the
early 2000s. But its fortunes sagged as the industry shifted toward
consumer-friendly phones from companies like BlackBerry Ltd. and
especially Apple Inc. Mr. Nadella's immediate predecessor Steve
Ballmer famously dismissed the iPhone in its early days for its
high cost and lack of a keyboard. "There's no chance that the
iPhone is going to get any significant market share," Mr. Ballmer
predicted in 2007. Since then, the company several times overhauled
its mobile executive team and repeatedly revamped its smartphone
software.
Each time, Microsoft said the changes would improve sales of
Windows phones. They didn't. At the same time, the market for
personal computers started to shrink, eroding Microsoft's central
position in computing.
Mr. Ballmer decided Microsoft couldn't just develop and license
the software that powered smartphones, as it had done with personal
computers. So he bid for Nokia in 2013 as a way to give Microsoft
control of smartphone hardware as well, mirroring Apple's iPhone
strategy.
"We've evolved our thinking," Mr. Ballmer said when unveiling
the Nokia deal in September 2013. He said Microsoft would "blaze
the trails here with our own first-party hardware."
He was unavailable to comment on Wednesday.
Mr. Nadella hasn't made that promise pay off. Fewer than three
of every 100 new smartphones sold world-wide bear Microsoft's
brand, according to research firm IDC, a bit less than the
company's market share at the same point in 2013. Meanwhile, Apple
and phone makers like Samsung Electronics Co. that use Google
Inc.'s Android software have solidified their grip on the
smartphone market.
"It was a series of missteps," said Jan Dawson, chief analyst at
researcher Jackdaw Research. Mr. Dawson said he believed Microsoft
would give up on its smartphone business unless it managed to find
its footing with a new version of Windows due to launch later this
month.
Meanwhile, Microsoft's losses on its homegrown phones have
increased. In the three months ended March 31, it lost an average
12 cents on each phone it built, before those devices even left the
factory floor. Microsoft fans have complained the company hasn't
released for many months a new model of high-end smartphone that
competes with the iPhone. Mr. Nadella has promised one before the
holidays.
For now, the continuing struggles in Microsoft's smartphone
business have forced Mr. Nadella to address questions of whether
the company would be better off dumping its mobile-phone operation
altogether.
"It is important for us to be in the handset market," Mr.
Nadella said at an April event in response to an analyst's question
about whether Microsoft should continue to make smartphones. His
email to employees on Wednesday restated the commitment to the
company's homegrown mobile business.
Mr. Nadella also acknowledged that Microsoft would revamp its
smartphone strategy, though he was light on the details. "We'll run
a more effective and focused phone portfolio business while
retaining capability for long-term reinvention in mobility," he
said in a statement.
Microsoft likely will reduce the number of phones it makes,
retreat from selling phones in some countries and reduce the number
of carriers it supplies, said a person familiar with the company's
plans. Microsoft acquired facilities from Nokia to manufacture some
Windows mobile phones. The company didn't announce changes in that
area.
Mr. Nadella said in a statement that Microsoft would seek to
encourage more independent phone makers to run Windows, just as
Microsoft does with PC companies. Phone makers such as HTC Corp.
and China's ZTE Corp. make handsets tailored to run the mobile
version of Microsoft's Windows software, but for now Microsoft's
own brand is responsible for an overwhelming majority of
smartphones that come with the Windows operating system. It isn't
clear independent companies would be interested in pushing Windows
smartphones that have so little sales potential.
The write-down of roughly $7.6 billion wipes out the majority of
the $9.4 billion in value Microsoft had recorded for the business.
The company also said it would take a restructuring charge of
between $750 million and $850 million as it eliminates up to 7,800
jobs out of a current workforce of 118,000.
Last July, Mr. Nadella said the company would cut up to 18,000
positions in the largest workforce reductions in Microsoft's
history. Most of those cuts were to reflect overlapping positions
from the Nokia deal.
Write to Shira Ovide at shira.ovide@wsj.com
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