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How Microsoft Is Pivoting Its Smartphone Strategy

NEW YORK – Microsoft will likely take a different tack when it comes to making smartphones, emulating its approach to Surface tablets now that it has announced plans for another major headcount reduction in the mobile-phone group, analysts said.

The computing giant will probably pare back its smartphone selection from around 10 low-price models today to focus on a handful of leading-edge phones that “highlight how well the platform can work on a mobile device,” said IDC analyst Ryan Reith. As it does with Windows-based Surface tablets, Microsoft will put out one or two high-end Windows phones that it sees as “the face of Windows phones,” using them as halo products to encourage consumers to switch to Windows phone and encourage other handset makers to pursue the market, he said.

Microsoft will likely design the phones and contract out manufacturing rather than manufacture them in-house, he noted.

As part of this, Microsoft is expected to reinvigorate its effort to get other smartphone manufacturers to adopt its Windows OS, given that Microsoft’s Lumia handsets currently account for the majority of Windows Phone sales and SKUs on the market, analysts said.

Plan B

Such a strategy could be a last-ditch effort to keep the struggling Windows Phone OS alive and turn around its shrinking market share, analysts said. If Microsoft fails, Plan B could be to keep the company relevant in the phone market by continuing to offer software and services for smartphones running other operating systems. “If Windows Phone doesn’t take off, Microsoft can still be viable in the mobile market by marketing core services like Outlook and OneDrive [to Android and iOS users],” Reith said.

Strategy shifts are in the works following the announcement that Microsoft will slash its cellphone business again as part of a larger restructuring that will cut up to 7,800 positions from the company’s roster of more than 118,000 people. The reductions will come primarily in the phone business.

“The future prospects for the phone hardware segment are below original expectations,” Microsoft said in announcing the cuts.

Microsoft acquired the business from Nokia in early 2014 for about $7.9 billion, U.S. Securities and Exchange Commission documents show, but later that year laid off about 12,000 of the 25,000 people that came with the acquisition.

With the latest cuts, the phone group’s head count will fall to about 15 percent of what it was at the time of the purchase in early 2014, said Reith. As part of those cuts, Microsoft significantly scaled back Nokia’s feature-phone business, he noted. With the latest cuts, Microsoft will record an impairment charge of about $7.6 billion related to its cellphone segment assets and goodwill and a restructuring charge of around $750 million to $850 million.

On The Defensive

Microsoft cut back quickly because its purchase of Nokia was a defensive measure to keep Nokia, the leading supplier of Windows phones, solidly in the Windows camp, analysts said. The acquisition did not represent a vision for the future “outside of a year or two,” said Reith, and now new CEO Satya Nadella is paring unnecessary overhead.

When former CEO Steve Ballmer announced plans in 2013 to buy Nokia’s phone business, Nokia “was the only phone OEM really behind the [Windows] platform,” accounting for about 95 percent of Windows Phone volume, Reith said, but Nokia had also begun developing Android phones.

Windows Phone, launched several years earlier, initially attracted suppliers such as Samsung, HTC, and LG, but they didn’t market the products aggressively or offer follow-up products because “Android was growing like wildfire,” said Reith. Android is “an easy and cheap platform to build on,” he explained.

The lack of Windows Phone users kept app makers from developing apps for the phones, analysts noted, contributing to further sales declines.

End Game

For his part, Strategy Analytics executive director Neil Mawston said Microsoft could get out of the handset business completely by 2017 if things don’t go right. “Step one for Microsoft today is to streamline and rightsize its struggling smartphone division. Step two is to introduce an upgraded Windows 10 platform for smartphone licensees. Step three is for Microsoft itself to deliver a killer smartphone model with Windows 10 that shows off the best of what Windows 10 can do. If Microsoft cannot deliver a smaller cost-base, better Windows 10 software platform, and best-in-class flagship hardware product by 2017, Microsoft will have to think seriously about taking over yet another smartphone manufacturer, or exit the smartphone game altogether.”

Nokia didn’t succeed in the phone business because “Nokia missed the global shift from keypad-based feature phones to touchscreen smartphones in the 2000s and it is still suffering from that misstep in the 2010s,” Mawston said. And “Microsoft is hampered by too many layers of management and a mobile-software development team that is significantly slower than major rivals like Android.”

Independent analyst Jeff Kagan sees Microsoft continuing to offer handsets for now but also ramping up efforts to offer software for iOS and Android devices. Such software could, for example let users sync contacts from a Windows laptop or tablet to Android and iOS smartphones, or perhaps delivers a Windows experience on Android and iOS phones.