Microsoft and mobile: The headache that won't go away

Monday Morning Opener: Microsoft's attempts to break through with its Lumia smartphones have not gone well, so where does it go next?

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Microsoft's Lumia 950 XL. Why has Microsoft found mobile so hard to crack?

Yet more painful news for Microsoft's smartphone efforts last week as it was revealed that the company's phone revenue has plunged by $1.2bn, selling six million less Lumias in its last financial quarter than it did a year ago.

Microsoft sold 4.5 million Lumias in its second financial quarter, generating around $1.1bn in revenue - a dramatic drop from the 10.5 million handsets and nearly $2.3bn in revenue a year ago.

It's not the end of the bad news, either, as Microsoft's CFO Amy Hood said the same decline is likely to happen in the next quarter too. In its third quarter last year Microsoft's phone revenue stood at nearly $1.4bn, on the back of 8.6 million smartphones sold - so that means we're likely to see that drop to somewhere near $700m instead (and presumably about 4.3 million handsets).

If that rate of decline keeps up, Microsoft's phone business will pretty soon be nothing more than a rounding error when it comes to revenue.

Plenty of people are now writing their obituaries for Lumia. And it's certainly hard to see where Microsoft can go from here.

One option is to keep Lumia (perhaps rebranded as Surface) going for the same reasons that Google has got Nexus - as a way of showing consumers and manufacturers the potential of the software. The trouble for Microsoft is that consumers aren't interested and neither are manufacturers any more.

That doesn't mean the Microsoft can't build hardware: Surface continues to grow and Hood said that following the launch of the Surface Book and Surface Pro 4 the tablet-PC device is likely to see continued momentum and growth as Surface Book becomes available in more countries.

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Microsoft's Lumia and Surface revenues. Source: Microsoft company filings.

Image: ZDNet

Indeed, as I predicted a while back, Surface revenue has now overtaken Microsoft's phone revenue (see chart above) which is a remarkable switch, considering that Surface was build from scratch and Lumia had Nokia's long smartphone heritage to build on.

Two years ago Microsoft thought that mobile was such an important gap in its strategy that is was worth spending $5.4bn on filling it by buying Nokia's handset business (it later took a $5.7bn write down on that). Mobile is where the growth is, it's where the apps are consumed, it's where the data is created.

Sure there are still plenty of PCs out there still (especially in business) but the momentum lies entirely with mobile. And sure, Microsoft is rapidly building its cloud computing infrastructure business, as Mary Jo Foley points out elsewhere on ZDNet, which means that Microsoft is benefiting at least indirectly from the growth of mobile which generates lots of need for cloud storage and processing.

But how much of a problem is the lack of a credible mobile offering, in terms of its own phones running on its own operating system, to its broader strategy? Microsoft has said it will continue to make phones: perhaps Continuum will encourage some enterprise users to keep the faith. Perhaps over time Windows 10 and Surface will do what Windows Phone and Lumia couldn't.

Will Microsoft have another tilt at mobile, or will it concede that Android and iOS are now uncatcheable and resign itself to offering services on top of them? What does that mean in the cloud-first mobile-first future? Riding on another company's operating system is one option, and Microsoft has been using this approach, but it means your service is never the defaul choice but just one among many.

It's clear that buying Nokia's devices business didn't fix Microsoft's mobile headache. But that doesn't mean that the headache has gone away.

ZDNet's Monday Morning Opener is our opening salvo for the week in tech. As a global site, this editorial publishes on Monday at 8am AEST in Sydney, Australia, which is 6pm Eastern Time on Sunday in the US. It is written by a member of ZDNet's global editorial board, which is comprised of our lead editors across Asia, Australia, Europe, and the US.

Previously on the Monday Morning Opener:

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