Where's Microsoft mobile heading?

05 Feb 2014

Microsoft has one of the most important quarters in its history. It is getting a new CEO and the Nokia acquisition should get final approval. Microsoft has also many challenges; Windows 8 has had a hard time, Windows Phone has been a failure, new solutions threaten its old cash cows like Office and other enterprise solutions, and the PC doesn’t anymore dominate as a personal ‘computing’ device. One of the key questions is, how is Microsoft going to handle mobile and mobility?

Windows Phone market share is far, far behind Android and iOS, and we cannot see signs of anything positive at the moment. Microsoft should now plan the next steps for Windows Phone and also for tablets (whichever operating system they will use). But it must also get its own hardware business to work, and integrate the whole Nokia phone organization.

Microsoft's new CEO is Satya Nadella, the company's former executive vice president for cloud and enterprise. Analysts believe he is a good person to lead the technology vision and he understands cloud and online services. They also see that CFO Amy Hood is an important partner for him. Together they must force Microsoft to build credibility and value for shareholders. Analysts also see that an aggressive cost cutting scheme at the former Nokia organization is a crucial start.

Microsoft will gain approximately 32,000 employees, over $10 billion in revenue and over a 3% global smart phone market share from Nokia. We can play with these numbers in many ways. For example, Blackberry and Sony Mobile only have about 7,000 employees and Motorola Mobile under 10,000. HTC has approximately 17,000 employees. All these companies are in the same market share ballpark. Nokia, of course, still also has the feature phone business, but its value goes down all the time and it is probably not very interesting to Microsoft.

We can also compare revenue per employee to those other mobile companies and Microsoft to the Nokia phone business. The comparison tells that Nokia should make over double or triple revenue with the current number of employees. The Nokia phone business has made losses or very weak results for a longer time. And of course it also has overlapping functions with Microsoft. The conclusion is abundantly clear; Microsoft should make very strong cost cuts and restructure the former Nokia operations. Based on financial analysis, it could mean 50% to 70% reductions in the organization.

Of course, the main question is, what is Microsoft’s mobile strategy, what can they do with the existing organization, what added they get from Nokia, how they get this to work together, and possibly develop or attain new components. The cloud, online offering and mobility are probably the most important parts of the strategy. That’s why they must get these to work seamlessly together. It can also mean that key functions and people must be near Redmond.

The other key questions are, 1) can Microsoft count only on Windows Phone in its mobility strategy, 2) is it possible to get other hardware vendors to use Windows Phone, 3) do they use resources to make their own semiconductors and chips (that Apple has started to do and Samsung has done; important differentiation factor) and 4) do they really get phones, tablets and PC’s to work smoothly together and use the same operating system. My assumption at the moment is that they cannot only count on WP, it is hard to get other vendors to use the WP, proprietary chips would mean fundamental changes for WP, and it cannot be the same operating system in all those devices, yet they should be compatible.

Google and Apple are now really pushing their office tools and enterprise solutions. I have heard, how system integrators have changed from Microsoft to Google in their enterprise solution offering. Microsoft has to stop losing that market. Its own hardware strategy has lower priority, if we think about the company’s financials. I think an important question is how to get people to use Office and Microsoft online services, although they use iOS or Android in their tablets and phones.

Microsoft has also a problem with its consumer brand. Companies are comfortable to use Microsoft, but among consumers their brand is not good. Can they change it, or is it better to focus entirely on the enterprise market? They have used a lot of money on advertising, but haven’t got any significant results as of yet. And they should also win support from the developer communities.

Nadella now has a lot of strategic questions. He must start to create a new Microsoft for a totally different environment than where the company’s strengths lie. Mobile is a very important part of this strategy. At the moment the Nokia integration and its role is one of the first key decisions to make. Nadella can easily ignore the former management’s promises; he must now focus on the future. It will probably mean a very hard time for the current Microsoft, Nokia phone and tablet organizations and also their strategic future must be built from scratch, not based on historical roles.

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