Microsoft today detailed the biggest blow of its short and tumultuous relationship with phone maker Nokia. The Redmond software giant lost $3.2 billion in its latest quarter thanks to a $7.5 billion earnings charge related to the company’s 2014 acquisition of Nokia’s phone division. It’s only the second quarterly loss Microsoft has posted since its 1986 IPO.
The earnings charge, and the nearly 8,000 laid-off phone employees that will accompany it, is a clear sign that Microsoft is abandoning former CEO Steve Ballmer’s attempt to be a phone powerhouse. Under Ballmer’s guidance, Microsoft purchased Nokia’s handset division for $7.2 billion. It’s a bitter and expensive breakup, but it appears both Microsoft and what’s left of Nokia will be better off in the long run.
From Microsoft’s standing, trimming phone efforts will allow the company to better focus on Nadella’s beloved cloud software during the launch of Windows 10. Microsoft was unable to make its phone division profitable — it posted a $104 million operating loss in the latest quarter — and Windows Phone has been pathetic — its market share is below 3 percent. Instead of trying to right Ballmer’s floundering effort, Nadella’s just going to let Microsoft’s homemade devices function as showcase pieces for company software, particularly Windows 10.
“Our approach to investing in areas where we have differentiation and opportunity is paying off with Surface, Xbox, Bing, Office 365, Azure and Dynamics CRM Online all growing by at least double-digits,” Nadella said in a statement. “And the upcoming release of Windows 10 will create new opportunities for Microsoft and our ecosystem.”
While Microsoft’s cutting its losses, Nokia trudges onward. The Finland company was known in the U.S. primarily for its once ubiquitous handsets — beginning in 1998, it shipped more phones than any company for 14 years in a row — but it still has a presence in consumer tech and telecommunications networks. But with Microsoft dumping Nokia’s branding and its greater phone business, Nokia plans to get back into designing and licensing consumer phones as early as 2016. Given Microsoft’s layoffs, Nokia could hire back some familiar faces if that effort goes forward.
Nokia’s device expertise won’t end with phones and tablets, though. The company is expected to announce next week a virtual reality product, one that could compete with Microsoft’s augmented-reality headset, HoloLens.
The paths of Nokia and Microsoft reflect the segmentation and specialization of the tech industry. Aside from Apple, few companies are in both the software and hardware business, and both Microsoft and Nokia are following that trend. Nokia used to manufacture its phones; now it will let partners handle that aspect. And instead of making a huge line of phones to get Windows 10 to the masses, Microsoft is hoping a few phones will enhance popularity enough that other companies will dump Android for Windows 10.
Ballmer’s desire for vertical integration in the mobile world could have paid off handsomely, but Windows Phone never took off. Thus, the division Microsoft bought from Nokia is now a sideshow attraction, and Nokia plans to go forward with a more stripped-down business.