Layoffs signal Microsoft is throwing in the towel on hardware (mostly)

satya wpc

Satya Nadella, Microsoft CEO

The company will use hardware primarily to show OEMs how it's done

Following rumors that started practically the day that Satya Nadella took the helm at Microsoft, the company this morning announced that it will lay off 18,000 over the next year. The bulk of the cuts – 12,500 -- will come from Nokia.

While some of those Nokia cuts may represent redundant jobs, the message from Microsoft with these layoffs is that the company is now shifting away from thinking about hardware as a real revenue stream, especially when it comes to phones.

Nadella hinted at this strategy shift earlier this week during his keynote at the Worldwide Partners Conference and both he and Stephen Elop, who now runs hardware at Microsoft, reiterated this new theme in memos to employees that the company posted online today.

"Our goal with first party hardware is to create categories and markets but we want to stimulate demand for the entire ecosystem," Nadella said from the stage at WPC. "We want to show the way."

Elop spelled it out even clearer in his memo. "It is particularly important to recognize that the role of phones within Microsoft is different than it was within Nokia. Whereas the hardware business of phones within Nokia was an end unto itself, within Microsoft all our devices are intended to embody the finest of Microsoft’s digital work and digital life experiences, while accruing value to Microsoft’s overall strategy," he wrote.

Both executives are saying that rather than hoping to build a major revenue stream from phones, the company is hoping to develop new ideas that showcase what's possible with Windows Phone and that OEMs might further develop in their own phones. 

Analyst Jack Gold of J. Gold Associates thinks that additional changes outlined for the phone group indicate that Microsoft is likely to make an even more radical move. "I expect that Microsoft will either spin out or sell off the phone business within 18 months," he said.

Like Google, which bought Motorola and later solid it off to Lenovo, Microsoft is learning the hard way that the phone business is a difficult one to win, Gold said.

It's hard to say if this strategy change will extend to Surface, Microsoft's other relatively recent foray into hardware. Surface hasn't been a particularly successful business, even though the tablets have delivered some unique and praise-worthy designs. Elop said that there will be limited change to the Surface and Xbox teams.

However, Nadella's comments during WPC were not specific to phones. Plus, he clearly said during his recent lengthy memo to the troops that he was moving away from Microsoft's "devices and services" strategy. There's a good chance that his "cloud first, mobile first" strategy includes making phones and tablets only to serve as idea machines for OEM partners.

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