By Shira Ovide
Microsoft Corp. tried for years to crack the mobile market,
developing its own software, its own handsets and spending billions
of dollars to acquire a company to unite the two. On Wednesday, the
Redmond, Wash., giant acknowledged it needs a new formula.
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 patents, and will cut up to 6.6% of its global
workforce--mostly in its mobile business--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 a
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, has won high marks inside and outside Microsoft
during his first 17 months on the job for bucking long-standing
traditions and proliferating the company's software beyond its
Windows operating system. But he also has presided over two rounds
of widespread layoffs, and the company's mobile hardware business
has been no better off under his watch.
Microsoft was among the early entrants in the mobile business
with phone software dating back to the 1990s. 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. Since then, the company several times overhauled its
mobile executive team, and revamped its operating software for
mobile phones. Each time, Microsoft said the changes would improve
sales of Windows smartphones. They didn't.
Mr. Ballmer in 2013 decided Microsoft had to do more than
license its smartphone operating software to independent hardware
makers, as it licensed Windows to personal-computing partners
including Dell Inc. Mr. Ballmer later cast the Nokia deal as a way
to control both the software and the hardware for smartphones, as
Apple does.
"We've evolved our thinking," Mr. Ballmer said when he unveiled
Nokia deal in September 2013. He said Microsoft would "blaze the
trails here with our own first-party hardware."
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.
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 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 is likely to pare back the number of phone models it
makes, retreat from selling phones in some countries and reduce the
number of cellphone carriers it works with, according to a person
familiar with the company's plans. Microsoft's own manufacturing
facilities make some of its mobile phones. The company didn't
announce changes in that area.
For now, Microsoft makes nearly all smartphones on the market
that run the mobile version of its Windows software. Mr. Nadella
said in a statement that the company would seek to encourage more
independent phone makers to sell phones that run Windows, just as
Microsoft does with PC companies.
It isn't clear independent companies will be interested in
pushing Windows smartphones that have so little sales potential.
Even before the Nokia acquisition, that company was responsible for
an overwhelming majority of smartphones with the Windows operating
system.
In the accounting write-down disclosed on Wednesday, the company
said it would record an impairment charge of roughly $7.6 billion
tied to the Nokia deal, wiping 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 for eliminating 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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