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What Does Microsoft Corporation's $7.6 Billion Writedown Mean for Windows Phones?

By Leo Sun - Jul 13, 2015 at 9:32AM

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Rumors of the death of Windows Phone have been greatly exaggerated.

Microsoft (MSFT 3.42%) recently announced plans to slash 7,800 jobs -- mainly from the former Nokia handset unit -- and write down over $7.6 billion on the business, along with a restructuring charge between $750 million to $850 million. Those charges would wipe out most of its original price tag, when Microsoft paid $9.5 billion to acquire the business last year.

Source: Microsoft

CEO Satya Nadella declared in an open letter that he remained "committed" to Microsoft's first-party phones but with a shift from away from growing a standalone phone business toward developing a "vibrant Windows ecosystem." Nadella stated that Microsoft will "run a more effective phone portfolio" and still produce three main categories of phones: enterprise devices, cheaper ones for emerging markets, and flagship phones for high-end consumers.

What that decision means
Microsoft is basically saying there is no reason to flood the market with its first-party devices. Including variants between geographical markets, Microsoft is currently launching an average of about one new phone per week, according to Bloomberg. For example, there are currently seven versions of the Lumia 640.

Under the new strategy, Microsoft will just launch about two new phones for the enterprise, emerging markets, and flagship categories per year. Launching six phones annually without wild variations might be a sound idea. After all, Apple only launches two new models per year, while HTC launched three.

Even though Microsoft produces a lot of different Lumias, only a handful are actually popular. According to June figures from research firm AdDuplex, the low-end, two year old Lumia 520 remains the top Windows Phone, with a 19.3% share of Microsoft devices. All of the other models each account for less than 10%.

The Lumia 520. Source: Microsoft

Therefore, if Microsoft takes its time and releases two compelling devices per category per year, the same users could upgrade to those devices while reducing hardware fragmentation. By reducing hardware fragmentation, it would be easier for Microsoft to install, maintain, and troubleshoot Windows 10 across its first-party phones. There will be fewer upgrade choices for Windows Phone users, but that does not necessarily mean that its market share -- which is currently less than 3% -- will decline.

No, Windows Phone is not dead
Tech sites quickly claimed the layoffs and writedown represented the "death" of Windows Phone. Richi Jennings at Computerworld bluntly declared, "Windows Phone is dead. Microsoft Lumia is dead."

Granted, the writedown and layoffs look terrible, but Microsoft did not say that it would kill off Windows Phone or the Lumia brand. Although Windows Phone has a small global share, it still holds a major presence in several key emerging markets. Last July, Microsoft announced that Windows Phones were outselling iPhones in two dozen countries, including India, Thailand, Mexico, Vietnam, and South Africa. At the end of last year, IDC added Brazil to the list. Most of these markets have lower incomes and smartphone penetration rates than the U.S., meaning that demand for cheaper smartphones -- like Windows Phones -- could rise over the next few years.

To capitalize on that growth and keep operating costs low, Microsoft might license the Lumia brand to a hardware partner. It would be similar to what Google does with the Nexus brand and what Nokia did last year with its N1 tablet.

Source: Microsoft

Why Microsoft will not kill Windows Phone
Keeping Windows Phone alive is crucial to building the "One Windows" ecosystem with Windows 10. That ecosystem -- which pulls phones, tablets, PCs, and gaming consoles under a single OS umbrella -- tries to balance Microsoft's strengths by leveraging strong markets, like PCs, to gain market share in weaker ones, like mobile.

The idea is that if a user is heavily dependent on a Windows PC, he or she might be willing to buy a Windows Phone that is synchronized via apps and cloud-based services.

Continuum, which scales a Windows 10 Mobile phone into a full Windows 10 desktop when plugged into a large screen, could merge mobile and desktop platforms together. Universal apps, which work across all Windows 10 platforms, could bring back app developers that shunned the narrow user base of Windows Phones. Cortana and Edge will sync user data across PCs and mobile devices as well.

The key takeaway
For now, Microsoft is simply reducing operating expenses, tightening up its mobile focus, and reducing hardware fragmentation across its devices. It would be silly to interpret those decisions as the "end" of Windows Phones.

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