What Is the Significance of Job Cuts at Microsoft’s Phone Division?

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Microsoft (NASDAQ:MSFT) announced on Wednesday that it was writing off 80% of the value of its Nokia acquisition and cutting up to 7,800 jobs, mostly from the phone business. [1] This move is significant as it hints at change in Microsoft’s strategy related to smartphones. We believe that instead of pursuing the intensely competitive phone hardware market, Microsoft is aiming to develop an ecosystem of applications that are Windows 10 ready, and can run across devices such as desktop, laptops and phones. Through this strategy Microsoft hopes to increase the popularity of Windows 10 and market it to original equipment manufacturers of smartphones.

Mr. Nadella said on Wednesday that Microsoft will not stop making smartphones, however it would no longer focus on the growth of phone business. He emphasized the  expansion of a broad “ecosystem” of products including mobile phones that run its Windows software. Microsoft said it would narrow its focus to three types of customers: 1) business users who want strong management, security and productivity apps; 2) buyers looking for inexpensive phones; and, 3) users heavily invested in Microsoft’s other Windows-based products.  This strategy will enable the company to cross sell its products. In this note, we explore the strategy in detail.

See our complete analysis of Microsoft here

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Focus On Developing Ecosystem That Targets Broad Spectrum Of Devices

While the iOS and Android based smartphone ecosystems continue to rule the market, Windows-based phones have not gained the necessary traction. Microsoft’s was hoping to achieve this objective with the acquisition of partnership Nokia. With over 1.4 million active apps, the Apple Store raked in over an estimated $15.3 billion in revenues from app sales in 2014. [2] Google Play currently has over 1.5 million active apps and revenues increased by a factor of 2.4  times year over year in 2014.

Windows 8 kernel-based phones failed to gain traction among customers and OEMs alike. This negatively affected the growth and development of the Windows ecosystem in the past. Over the course of the software, Microsoft has managed to develop only 340,000 apps. The company hopes to attract more developers to Windows 10 development environment by offering greater incentive. Microsoft plans on funding and supporting the Windows 10 app development platform with a focus on mobile app development. This is a software-defined strategy that will enable Microsoft to increase Windows appeal, especially among OEMs. A stronger Windows OS, with better apps and developer support, could make the Windows ecosystem a strong third contender behind Google’s Android OS and Apple’s iOS. This can help convince customers to persist with Windows PCs and tablets. It can also incentivize app development, and create a sustainable and profitable ecosystem for developers and users in which to thrive. A strong OS can translate into higher revenues from Windows hardware and software in the future.

Cross Sell Its Apps And Services To Enterprise Clients

Globally, many companies have Window PCs installed across their offices. We believe that Microsoft can leverage these existing ties with its enterprise clients to sell more apps, services and solutions based on its smartphone offering . Additionally, these enterprises run ActiveSync, a Microsoft app released in 1996 to synchronize data between mobile devices and desktop computers, for mobile device management and security. The company can exploit this to pitch its connectivity solutions to its enterprise clients. Microsoft can make security a standout feature for smartphones running on the Windows 10 OS.

We have $44 price estimate for Microsoft, which is in line with the current market price.

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Notes:
  1. Microsoft slashes 7,800 workers in latest retreat from failing smartphone business, July 8 2015, www.washingtonpost.com []
  2. Trefis Apple estimates []