Microsoft (NASDAQ:MSFT) CEO Satya Nadella has never hesitated to undo one of Steve Ballmer's moves.
The new boss opened up the company's products for use on rival operating systems, and he has steadily changed the perception of the brand, both internally and externally. Perhaps most notably, Nadella has made it clear that he was less than thrilled with his predecessor's $7.2 billion acquisition of Nokia's (NYSE:NOK) wireless-phone business.
One of his first moves as CEO was laying off thousands of former Nokia employees. Despite those cuts, the company charged forward, releasing a number of new Windows Phone models. Now, in an email to employees, he has announced that another 7,800 people will be let go, "primarily in our phone business." In that note he also declared that the company will undergo a "fundamental restructuring of our phone business" and that, as a result, "the company will take an impairment charge of approximately $7.6 billion related to assets associated with the acquisition of the Nokia Devices and Services business in addition to a restructuring charge of approximately $750 million to $850 million."
This isn;t a total exit from the phone business, but it's at least a strategic retreat that shows that Nadella thinks it won't be possible to broadly compete with Apple's (NASDAQ:AAPL) iPhone and phones running Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android OS.
What is Nadella doing?
The CEO made it clear that the company isn't exiting the phone business or giving up on making devices. Instead, he said the changes represent a focusing of the company's efforts:
I am committed to our first-party devices, including phones. However, we need to focus our phone efforts in the near term while driving reinvention. We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem that includes our first-party device family.
Basically, instead of just throwing a lot of phones at the market and seeing which ones stick, the company is going to release phones in line with what Windows customers need. That might mean models tailored to enterprise users and perhaps a continued focus on entry-level customers in the developing world.
In his note, Nadella laid out the markets he wants to focus on:
We plan to narrow our focus to three customer segments where we can make unique contributions and where we can differentiate through the combination of our hardware and software. We'll bring business customers the best management, security, and productivity experiences they need; value phone buyers the communications services they want; and Windows fans the flagship devices they'll love.
It's not the death of Windows Phone, but it is the end of Windows Phone as a major player. This may sound like a defeat for the company, but it could lead to well-received devices that serve a specific market.
The company has had some success with its Surface Pro 3 model, a hybrid computer aimed at business users. That's a niche audience, but it's one that's important to Microsoft. Future iterations of Windows Phone could serve those types of distinct market niches.
Is this going to work?
Trying to compete with iOS and Android while hovering around 3% market share was not a winning strategy for Microsoft. It was a plan built out of the company's former dominance, where its ubiquity in PCs gave it power to push software and other products.
Those days are gone. Even hardcore business customers are willing to allow employees to use Windows-based PCs and iPhones. Microsoft can't force that audience into Windows Phone, but it can entice them there if it delivers devices with the wow factor of the later-model Surfaces. The same could be true on the entry-level side of the market, where a low-end, inexpensive Windows Phone might be a better choice for a person who lacks a tablet or computer.
It's not an easy strategy, but it's one where small victories can occur. That means giving up the dream that Windows Phone will capture huge market share, but that simply wasn't happening anyway.
Nadella has acknowledged that focusing on pieces of the market might win the company a base of customers. That's a huge change, but it's a path to eking out an audience. That may not be sexy, but it has the potential to work, and Nadella has shown the ability to swallow his pride to follow a winning strategy.