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Microsoft re-focusing phone strategy

July 9, 2015 - strategy, tech
Microsoft re-focusing phone strategy

FT reported Microsoft’s massive $7.6bn writedown from Nokia’s $7.9bn deal and cut 7,800 jobs, mostly from Nokia.

There are lots of examples of value-destroying acquisitions but few are as fast and brutal as Microsoft and Nokia

According to FT, among Microsoft’s businesses Nokia is the only one that reported gross losses before tax in the most recent quarter. Microsoft will continue making phones as part of the newly formed Windows and Devices group. The strategy is to position phones as an integral part of the broader Microsoft ecosystem which makes sense in terms of offering a comprehensive experience. Quick look at their near term phone strategy:

1) Business phone users with focus on management, security, and productivity – not sure this is the best place to continue given its position against iPhone and Android (Blackberry?). That said, Microsoft has the advantage of integrating its phones with its broader Windows ecosystem which is mainstream in corporate environments (Office, Office365, OneDrive). The question is – can they raise above the 2-3% market share and compete effectively with iOS and Android? Is there an option and does it make sense to offer an Android windows phone integrated with Windows/Office?

2) Value phones focused on low end segment offering basic telecommunications services. Plenty of competition here from lower-cost providers such as Samsumg, Xiaomi, Huawei, Micromax (see chart below from trak.in). Still unclear why this is strategic – perhaps high volume?

Global-Smartphone-Top-10

3) Windows phones for Microsoft fans makes more sense to me. Microsoft can serve these customers with more focus, better economics, and likely capture more value per phone. For reference, chart below covering mobile phone market share (from Net MarketShare via windows8core.com). According to the chart Microsoft has a 2.25% market share from a market size of 1.3bn mobile phones a year (IDC) which means Microsoft sells around 30 million mobile phones a year. At an average price of $100-300 (estimated) Windows phone revenue would be approximately around $3-9bn out of Microsoft’s $86bn annual revenue (2014). Is the small revenue contribution and ecosystem enablement still worth operating in a highly competitive environment? One justification I can think of is high growth in mobile market and market share lift opportunity.

Windows-Phone-Market-share-January-2015

Kudos to Satya for taking bold moves to unwind troubled business units and focusing on a robust Microsoft experience across platforms.

Source: Microsoft: dialling it down – FT.com