Microsoft: writing down, but not writing-off

Microsoft announced on 8th July it is writing down the value of its Nokia Devices and Services acquisition by $7.6 billion and making a further 7,800 redundancies as part of its business unit restructuring. But it isn’t writing-off its smartphone business altogether or its efforts to forge a third ecosystem to rival those of Google or Apple.

When Microsoft acquired the Nokia devices and services business it took-on 25,000 employees associated with the Nokia units. When this newly announced round of cuts has been affected — expected to be substantially in place by year end 2015 and fully so within the fiscal year — fewer than 5,000 of the original 25,000 employees that made the transition will remain.

As we outlined in our blog post: Elop, a canary in a coalmine?, we expected Microsoft would change its stance on the mobile devices business. To us there was always a tension between Microsoft’s stated intentions to make-the-market for Windows-based smartphones and to be a leading volume share player in the market. Executive remuneration was tied to the latter not the former – so there was, at least in the offices of the handset business, every incentive to compete aggressively against Microsoft’s own licensees. That, to us, seemed like a no-win strategy.


What we expect to see in its place is something more like the Surface Pro business model, where Microsoft develops innovative products in a pathfinder role. OEMs that are surviving on wafer thin margins can’t risk investing in product programs that may fail. They therefore tend to stick to proven but unadventurous designs that do little to create innovation or catalyse demand. With Microsoft taking the product development risks, fast follower firms can slipstream Microsoft’s innovative approach and then take-on the concepts, developing and productising them. In so doing they help Microsoft to grow its platform (Windows OS + services), which ultimately is what Microsoft cares about. This is the role we now expect Microsoft’s radically slimmed smartphone business to focus on.

Satya Nadella was never a proponent of the Nokia Devices and Services acquisition. He likely saw it as a cosy deal between the two Steve’s (Ballmer and Elop). Now that he’s in charge of the company’s strategic direction he is working to undo what he saw as wrong-headed while salvaging what he perceives as valuable from the wreckage. On the strength of the financial and workforce changes — it doesn’t look to be very much, but it’s not nothing either.

We continue to believe that Microsoft is playing a long game. It has lost the smartphone battle. It is instead placing its bets on a growing suite of platforms and services that will keep it continually relevant for years to come. This looks smart.