Microsoft's mobile phone failure

Satya Nadella's vision to angle a leaner Microsoft towards 'productivity and platforms' is unconvincing without a strong slice of the mobile market.

The Conversation

The pain, it seems, is not over for former Nokia workers as their new employer, Microsoft, prepares to cut its workforce by a massive 18,000. Although Microsoft has not announced where all of these cuts will come from, 12,500 are expected to be from the newly acquired Nokia mobile business which added an extra 25,000 staff this year to swell Microsoft’s staff numbers to 127,000.

It is not surprising that Microsoft would want to reduce its staff numbers. In a simple comparison of productivity of net revenue per staff between Microsoft and other tech leaders like Google and Apple, Microsoft was lagging even before it took on the extra Nokia staff (see table below). At 127,000 staff, profitability would have taken a big hit.

Net Revenue per staff (2013). Data from Google Finance and Wolfram Alpha.

The layoffs are expected to cost Microsoft between $1.1 billion and $1.6bn over the next year in pre-tax charges, which makes the Nokia purchase even more expensive.

The new direction

Recently, Microsoft chief executive Satya Nadella sent an email to staff announcing the new direction for the company. No longer would it be a simple “devices and services” company but it would become a “productivity and platform company for the mobile-first and cloud-first world”. It was no secret that former chief executive Steve Ballmer completely misread the iPhone’s potential and consequently consigned Microsoft’s role in the mobile market to that of an extra. Microsoft however has always believed in the mythology that even though they come to a market late, they could always catch up through sheer will and the declaration that they are suddenly all about devices and services. This was certainly true when they held a monopoly in the PC market, but it is unfortunately not the case in markets for which they no longer have any influence.

Satya Nadella is now doing what most new CEOs do and declaring a new vision for Microsoft which is all about productivity. This may guide Microsoft into deciding what they don’t want to be doing but unfortunately says very little about what they can do in a market in which they have no presence.

The massive cuts perhaps signal that Nadella has no confidence that Microsoft will be able to make something of the mobile phone business it bought for $7.2bn. This wouldn’t be the first time that Microsoft has written off a massive purchase. In 2012, it wrote off most of the $6.2bn it had spent on online advertising company aQuantive.

Nokia’s mobile phone business was already struggling before Microsoft bought it and with the layoffs and change of direction, it seems clear that this is unlikely to change.

Xbox not core

As part of the re-definition of Microsoft, it seems that some of the staff cuts will come from the no-longer-core Xbox division. At one point, Microsoft used the Xbox as the spearhead in the fight for the living room. Again, it viewed the battle to be about PCs. Prior to the Xbox, Microsoft had developed Windows Media Centre with the view that people would have a PC in their living room and this would replace all other types of media devices.

What happened however was that people didn’t want PCs in their living rooms and opted instead for smart TVs and a plethora of small inexpensive media players that now include the Apple TV and Google’s Chromecast. If they wanted to surf the web at the same time, they used their tablet and/or their mobile phone.

As far as the Xbox went, this was never going to make it beyond the gamer in the bedroom. It was certainly never going to make it as the centrepiece of the living room.

The Microsoft legacy

However Microsoft decides to 'tweak' or restate its business, its fundamental challenge will be that it has no presence in the mobile market. As Apple and Google continue to eat away at the dominance of Windows on the PC, even Microsoft’s two principal cash cows, Windows and Office, are at risk. If mobile defines our future productivity, Nadella’s vision for his company seems unrealistic and it is hard to see a future where Microsoft continues to play anything other than a legacy role.

The Conversation

David Glance does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published on The Conversation. Read the original article.

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