Analysis: Nadella threatens to consign Microsoft to a future of desktop obscurity

Satya Nadella.

Credit: Microsoft

The prevailing wisdom is that Windows Phone is an unmitigated disaster that has failed globally. Microsoft appears to have responded accordingly, gutting what was left of its phone division with 7,800 layoffs and writing down $7.6 billion of assets acquired in the purchase of Nokia’s Devices and Services business.

This comes shortly after last week’s announcements that an image acquisition group that was formerly part of the Bing Maps team was being sold to Uber, and that the display ads business was being sold to AOL.

In the mission statement Microsoft CEO Satya Nadella disseminated late last month, he said that there would be “tough choices” ahead. It’s not clear just how tough it was to choose to get rid of a division that he reportedly didn’t want anyway, but I assume this is what he had in mind.

Today’s announcement was paired with another missive from the CEO that continues the trend of buzzword-heavy content-light statements. This affirmed the mapping and advertising changes, and purportedly laid out the new vision for phones.

This new vision is not laid out clearly. Over the past 18 months or so, Microsoft has had abundant phone offerings aimed at the value segment (the Lumia 400, 500, and 600 ranges) and mid-market business segment (the Lumia 700 and 800 ranges). It has failed, however, to show any meaningful progress in the flagship space, with no good replacements for the Lumia 930 (jack-of-all-trades flagship), the Lumia 1020 (super-duper camera flagship), or the Lumia 1520 (phablet flagship).

Simultaneous with this, a surprisingly large number of OEMs have announced or brought to market their own Windows Phone devices, aimed primarily at the low end, with a few mid-range offerings.

The new plan? Microsoft is moving away from a strategy of growing a “standalone phone business” in favor of growing a “vibrant Windows ecosystem that includes a first-party device family.”

Of those first party phones, Nadella writes that the company will narrow its focus to three segments (instead of the two currently being served), with value phones, business phones, and, at long last, flagship phones. This seems wider, not narrower.

A scaled back line-up

Bloomberg reports that, according to someone “familiar with the plans,” the focus will come from cutting the number of models to two in each category, refreshed on an annual basis. The narrowing comes not from cutting the number of segments, but in reach.

Such a policy will leave gaps, especially in the highly price discriminating value segment. At the high end, a price difference of ten or twenty bucks is likely pretty irrelevant, but in a market of handsets costing $80-$200 off contract, differences of a few dollars matter a lot more. This is why Nokia’s product pipeline, inherited by Microsoft, had such a wide range of options.

The Lumia 400, 500, and 600 ranges together have 10 main Windows Phone 8.1 models, even more if you include all the single/dual SIM and 3G/LTE variants. This ensures there’s a phone for every wallet. The Lumia 430 in India, for example, is available at $69. The 435 Dual SIM at $74, the 530 Dual SIM at $85, the 532 Dual SIM at $89, the 638 LTE at $95, the 535 Dual SIM at $126, and the 640 Dual SIM at $142 (all prices taken from Microsoft’s listings). There’s no way to reach a similarly wide range of price points with just two phones. “Focusing” on two models means giving up market reach.

From left to right, the Lumia 530, 535, and 630/635. The familial resemblance is pretty strong.

Credit: Peter Bright

And it’s not just Nokia that does this. For example, Chinese manufacturer Xiaomi has been selling Android phones into India for the past year. It has eight different models, priced at $94, $110, two at $157, two at $204, $235, and $377. Having a range of handsets and prices isn’t some undesirable quirk of Nokia’s line-up. It is the cost of doing business when going after this price conscious value market.

As for (finally) having flagship phones, while this personally makes me happy as someone who likes Windows Phone, I don’t expect them to move the market much. They never have in the past. They’re important to have, as aspirational devices to show what the platform can really do, and they offer Microsoft an opportunity to show off with, for example, high-end cameras, but the value segment is where the biggest sales are. But the value segment can’t survive on two price points.

An argument could be made that Microsoft is simply making space for third party OEMs to make these low price offerings; there will still be $60, $70, $80, $90 Windows Phones, they just won’t all be Lumias. In this world, the first party devices will take on a role similar to the Surface; benchmark devices that will in some ways lead the market, with the third party OEMs filling in the gaps.

Lumia isn’t Surface

Surface, after a faltering start, has arguably been influential. For many years, PC OEMs churned out garbage systems by the boatload. Now, it feels as if a corner has been turned. We’ve seen some stand-outs such as the Dell XPS 13 and HP Spectre x360, and even cheap desktops have impressed us.

Problem is, the Windows PC market is entirely different from the Windows Phone market. While the PC market is slowly declining, it’s still vast. There’s no shortage of companies building Windows PCs, and there’s still a considerable demand for Windows PCs. Even with Microsoft’s decision to build Surface, there was no risk that OEMs would all just decide to quit the market. It’s too big and too important. The Surface model (or perhaps more accurately, the Google Nexus model) works when companies are going to build the product anyway.

Windows Phone’s situation isn’t like that. Demand for the products is much more tenuous. OEMs can afford to abandon it in an instant, and just stick with Android. If Microsoft is willing to largely abandon this market segment, what reason is there for anyone else to stick with it? Microsoft can afford to sell value market phones at little to no profit, and Microsoft can justify this for strategic reasons—to broaden the reach of the Windows platform. But nobody else can. And it’s not really clear why they should.

As such, it’s hard to interpret the move as anything other than a drastic scaling back of Microsoft’s ambitions. It wouldn’t be entirely surprising if this move were a precursor to leaving the phone market entirely.

Awful timing

The timing for this is simply astonishing. For the last couple of years, Microsoft has been selling developers on the notion of “Universal Windows Apps;” a common API platform that lets them build apps that with few changes will run effectively on phones, tablets, PCs, Xbox-connected TVs, and eventually the HoloLens.

Xbox and HoloLens are always going to be niche offerings, but the phone-tablet-PC market could be substantial. Even at its current size of a few tens of millions users, Windows Phone would be a nice bonus on top of the PC market, such that developers might be able to justify developing Universal Windows Apps.

But that Windows Phone market is built predominantly on the back of cheap devices. Windows Phone has been modestly successful in parts of Europe, for example, and while Microsoft has done little to stimulate this—a proper flagship device and something more than “alpha” quality Cortana would surely have helped, as would making Bing better outside the US and UK—Windows Phone has broken 10 percent in some markets, and it has done so thanks to the range of affordable handsets.

With those going away, thanks to the new “focus,” it’s not clear how this user base will be retained, much less expanded. That in turn reduces the value of Universal Windows Apps. It might be worth using a new (and still quite limited) API if it gives better reach to tens of millions of users. But if those users aren’t there, why bother? If the only place that a Universal Windows App can easily reach is a Windows desktop user, developers may well be better off sticking to the ancient Win32 API (it’s old and crufty, but much broader in scope than the Universal API), or even ditching the app entirely and building for the Web.

Mobile is an integral part of the value proposition

Universal Windows Apps need the phone platform to make sense. Microsoft hasn’t even released its Universal Windows App operating system—Windows 10 ships this month, Windows 10 Mobile later in the year—and already it has threatened to cut the platform off at the knees, drastically reducing its investment in the phone business and making Universal Windows Apps functionally a lot less universal. Steve Ballmer’s vision of “Windows Everywhere,” a vision that was just about to come to fruition and do so in a way that actually made sense, is derailed at the last minute. Microsoft has been readying itself for this moment for years—the awkward Windows 8 transition and the painful Windows Phone 7 abandonment were both motivated by this Universal App idea—and has very visibly undermined it.