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Microsoft Takes a Step Back On Phones

By Jamal Carnette, CFA - May 19, 2016 at 7:55PM

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Surface Phone or not, Microsoft is in the process of exiting the smartphone business.

Editor's note: An earlier version of this article incorrectly stated Microsoft sold the rights to smartphones and feature phones. This article originally appeared with the headline "Microsoft Finally Waves the White Flag on Smartphones." It has been updated. 

Although the company still sells phones on its website, Microsoft appears to be exiting the smartphone business. Image source: Microsoft.

In 2014, Nokia (NOK 0.21%) effectively exited the device market when its devices and services business sale to Microsoft (MSFT -1.05%) closed for $7.2 billion. Nokia's high-end Lumia line and low-end, developing-market Asha line, along with Nokia president and CEO Stephen Elop and Nokia's manufacturing plants, supply chains, and employees, were included in the deal.

After dominating the handset market with nearly 50% market share in 2007, Nokia found itself unable to match the ascendance of Apple and Samsung, and saw its market share drop to less than 5% in late 2012 as the close relationship with Microsoft was unable to reverse Nokia's fortunes. "Microkia's" fortunes fared no better post-acquisition; new CEO Satya Nadella took a $7.6 billion writedown on the phone line and let go of 7,800 workers, most in the phone business.

Microsoft’s recent announcement represents a further step away from former CEO Steve Ballmer’s vision of being a “devices and services” company.

Microsoft steps back

According to a report from The Verge, Microsoft is selling its feature-phone business to a division of Chinese manufacturer Foxconn for $350 million. Foxconn has been aggressive about moving up the value chain in phones in order to profit from more than just assembly.

Most notable was the deal with Canadian smartphone company BlackBerry to design and distribute new BlackBerry models, with the newest models sporting Alphabet's Android operating system. With this deal, however, Foxconn will control the software in addition to the aforementioned design, assembly, and distribution.

After years of the Nokia brand being downplayed, it appears the name will be returning to devices. In the wake of Microsoft's announcement, Nokia revealed it would license its brand and IP to a Finnish company, AMD Global. Nokia, AMD Global, and Foxconn worked together to bring a tablet, the Nokia N1, to market in 2014. As a condition of the sale to Microsoft, though, Nokia was unable to enter the smartphone market until 2016

Windows Phone isn't technically dead, but...

Microsoft hasn't officially thrown in the towel on being a devices and services company. This deal is specifically for feature phones; Microsoft retains the rights to its operating-system powered Windows Phone devices. The company specifically mentioned it would continue to develop its WP 10 OS, and to support phones currently using the operating system which are manufactured by Microsoft and its hardware partners.

Under Nadella, Microsoft has redefined the idea of "mobile-first" by working to profit from all mobile devices, not just the units his company manufactured. Additionally, the company continues to market its Surface line of tablets and has added a two-in-one device using the Surface branding.

Nadella’s clarification of “mobile first,” combined with the writedown and the lack of new features or updates in nearly two years, point to a company looking to exit smartphone operations. Rumors as well of a Surface Phone continue to be bandied about. But even if Microsoft is able to make a high-quality Surface Phone, it's unlikely to change WP's trajectory as the smartphone market has become a mature-upgrade driven market in the high-end.

At this point it seems more likely Microsoft will exit the phone business entirely than challenge high-end device makers like Apple and Samsung.

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