Microsoft is officially backing away from Nokia with a new smartphone strategy that includes a focus on business users.
Less than two years after buying Nokia for $7.2 billion, Microsoft will lay off about 7,800 employees, mostly in its Windows smartphone hardware business, over the next few months and take a $7.6 billion write-down related to assets from the acquisition. Microsoft will also assess a restructuring charge of $750 to $850 million.
Almost a year ago, Microsoft said it would lay off a total of 18,000 employees with about 70% coming out of the Nokia division. Last month, amidst a large executive restructuring, former Nokia CEO Stephen Elop left his role in Microsoft's device business.
In an email to employees this week, Microsoft CEO Satya Nadella said the company remains committed to first-party devices, including phones. Microsoft will focus its newly-formed Windows and Devices Group on three customer segments: business users, value phone buyers and flagship phone users.
The company will also look to "drive reinvention" in its phone business following the reduction, Nadella said, adding Microsoft plans to move from a strategy to grow a standalone phone business to a strategy for "a vibrant Windows ecosystem including our first-party device family."
Nadella's decision to effectively squash an acquisition made by his predecessor, Steve Ballmer, was the right one, said Jack Gold, principal analyst and founder of J. Gold Associates LLC in Northborough, Mass.
"For Microsoft to be a commodity supplier of hardware makes no sense," Gold said. "It's a very low-margin business to begin with. Microsoft makes a lot more in the ability to license [intellectual property] to Android users and in selling back-end services than in running Nokia."
Nokia write-down good for Windows Phone?
With the new Windows 10 mobile operating system expected to arrive sometime this year, Microsoft has its work cut out for it to eat away market share in an enterprise smartphone landscape dominated by Apple iOS and Google Android devices.
The key is to make something with broad appeal, like iOS and Android devices, Gold said.
"If [Microsoft] can come up with a device that's attractive to businesses and attractive to [consumers] wanting to use it, then they've got a winner," Gold said. "That's what they need to focus on."
Getting away from the failure of Nokia could actually help Microsoft as an enterprise device company down the road, said Rob Helm, managing vice president of research at Directions on Microsoft in Kirkland, Wash.
"You could see more devices like the original Windows Mobile that are designed specifically for businesses and vertical applications, and correspondingly less Microsoft engineering effort going into cheap and mid-range consumer phones," Helm said.
As for moving toward a "vibrant Windows ecosystem" including first-party devices, Microsoft could stick mostly to software and use hardware to promote it as opposed to becoming a hardware vendor like Apple, Helm said.
"That bodes well for enterprise customers who have been betting on Microsoft's software and want Microsoft betting on it, too," he said.
Samsung's earnings sag
The Microsoft smartphone news comes as Samsung issues guidance for Q2 2015 earnings that were weaker than anticipated.
The company expects to earn approximately $6 billion U.S. for the quarter, down 4% from the same quarter last year. The Wall Street Journal reported the downturn is due to sagging sales of Samsung's flagship smartphone, the Galaxy S6.
When Apple released its larger-screened iPhone 6 and 6 Plus smartphones last year, it may have lessened the need for similarly large phones like the S6, said Bob O'Donnell, founder and analyst with TECHnalysis Research LLC in Foster City, Calif.
"Samsung is on the leading edge of some of the challenges for smartphones," O'Donnell said. "I think we may hit the peak of smartphone growth this year."
The innovation of the devices may have also slowed down and there's not much feature differentiation between the S6 and previous versions, O'Donnell said.
"It's a bigger phone but there's really not that much to it to make it stand out," he said.
Samsung also had some interest in releasing Windows Phone 8.1 mobile phones earlier this year, according to published reports.