Microsoft – Holding pattern.

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Phones effectively paused while ecosystem is fixed.

• Microsoft is reducing the scale of its mobile phone business into line with the other hardware businesses with the exception of the Xbox.
• A thumping $7.6bn write down will be taken against the acquired assets of Nokia reducing them to close to zero and a further 7,800 positions are to go at a cost of $750m-$800m.
• Microsoft took on around 25,000 people when it acquired the Nokia devices and services business in 2013 which will now be reduced to just 4,700.
• These are hard and heavy cuts and I suspect that my hopes that Microsoft will stem market share losses in 2015E will be dashed.
• This will add salt to the wound as it compounds one of the biggest problems that Microsoft has in mobile phones.
• This problem is that third party app availability is an important part of delivering a vibrant ecosystem and here Microsoft is really struggling.
• This move will only add to the external impression that the company is giving up on mobile phones.
• This will make it even harder for Microsoft to convince developers to support its platform further compounding the problem.
• Contrary to popular belief, Microsoft is not giving up entirely but is focusing on three segments: enterprise and productivity, feature phones in the low end and flagship devices for die-hard fans.
• This effectively puts the mobile phone business into a holding pattern until such time that the ecosystem is good enough to drive adoption of the hardware.
• However, this strategy has a problem.
• RFM research indicates that users primarily make their ecosystem choice based on their Digital Life and third party app experience on their smartphones as this is where they spend most of their time.
• Hence it will be difficult for the ecosystem to drive smartphones as the market reality appears to be the other way around.
• That being said, other handset makers are having such a rough time with Google these days that they could look to Microsoft once again if Windows 10 lives up to its promises.
• Microsoft still has three missions to accomplish (see here) but the mission to create a vibrant consumer ecosystem has just got a little bit harder.
• The good news is that Microsoft has done such a good job in controlling the decline of its legacy businesses that the shares are still attractive even if it fails in the ecosystem.
• This is why it remains my top choice, along with Google, as the current share price values the ecosystem ambition at zero.