The economy is rough right now and it is hitting everybody hard, including tech companies. Microsoft, which has made some cuts before, just announced its largest job cuts to date while also stating that it was abandoning its low-end Nokia X line of Android handhelds. According to the company, 18,000 jobs will go into next year, representing about 14% of the company’s 127,000-member workforce. Approximately 12,500 of the layoffs will come from factory and professional jobs that were related to Microsoft’s acquisition of Nokia back in April, which added nearly 25,000 jobs at Microsoft.
One area of business that will feel a major impact from this is Microsoft’s smartphone business, which has been faltering as of late. Microsoft’s smartphone business is mainly powered by sales of the company’s Windows Phone, though after being on the market for nearly 4 years, Windows Phone has only reached less than 4% of the global smartphone market.
After Microsoft made the announcement about the layoffs Analyst for J. Gold Associates Jack Gold predicted that Microsoft’s phone business will be sold or spun off within the next 18 months. This follows the same pattern that Google went through with its acquisition of Motorola’s phone business, which it expeditiously sold to Lenovo.
As a direct result of the layoffs, Android phones in the low-end Nokia X line will be discontinued. Nokia introduced the X line before the business was sold to Microsoft in April. According to CEO Satya Nadella in a letter to workers, “We plan to shift select Nokia X product designs to become Lumia products running Windows.”
A separate letter to employees from Vice President of Devices and Services Stephen Elop (also former CEO of Nokia) stated that the shift of Nokia X to Windows Phone will happen immediately while sales of existing Nokia X products will continue. “We will be particularly focused on making the market for Windows phone,” Elop added. Elop also noted that Microsoft would target sales of affordable smartphones within the Lumia line in order to gain a foothold in the rapidly-growing market.
Elop also left room for “great breakthrough products” designed to win sales in the higher end of the market. Separate smart devices and mobile phones business units from Microsoft will be combines into one phone business, according to Elop. A majority of Microsoft’s phone production will occur in Hanoi with a small part continuing in Beijing and Dongguan, China. A phased exit of phone from production from Komaron, Hungary is also in the works, according to Elop.
Just as it was under Nokia, phone engineering will continue to be concentrated in Finland, with high-end Lumia products being developed in Salo, Finland and affordable products being developed in Tampere, Finland. In addition to that, the devices team will also continue to develop tablets, which will result in “limited change” to the Surface tablet team and those building Xbox devices.
Even though there is a new focus on Phones at Microsoft, Gold states that the company faces big challenges in the future. Even if Microsoft was able to grow its share of the smartphone market to 5% globally it would still only represent a 50% growth from its current share of 3% to 3.5%, which Gold describes as a “daunting task”.
Gold believes that refocusing Nokia phones away from the X line is a “sound strategy but is unlikely to be very successful in greatly increasing market share.” Gold also called this move a “first step down the path of making the phone business saleable”, which could happen in the within the next 18 months.
Chief of Research at Kantar WorldPanel Carolina Milanesi believes that Microsoft’s new phone strategy is “go cheaper to go wider”, which she explains means having more lower-end products and getting into more wireless carrier product portfolios.
Even though Microsoft has been rumored to be developing a smartwatch to compete with Google and, probably, Apple, Milanesi stated that a smartwatch is not a top priority for the company at the moment. “Future products like a smartwatch depend on how they all fit into Nadella’s strategy, but considering their focus is on productivity and platform and services, it would seem to me that something like a smartwatch would not be a key priority.”
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