Microsoft, Lumia and Windows Phone: Where now?

Microsoft's Lumia sales have dived again: is there any way back?

Where next for Microsoft, Windows Mobile and Lumia?

Microsoft's smartphone sales have plunged again: the company has revealed it only managed to sell 2.3 million Lumia smartphones in its third quarter -- down from 4.5 million in Q2 and down from 8.6 million in the same quarter a year ago (to put that in context, Apple sold 75 million iPhones according to its last quarterly results).

The decline isn't a huge surprise: Lumia sales have been sliding for some time now and Microsoft had already warned that the decline would continue this quarter -- not a very good return on the $5.4bn Microsoft spent just two years ago.

Microsoft's Amy Hood noted that sales of Lumia smartphones in its third financial quarter "were weak" and that at the end of the quarter it had "relatively high channel inventory"; that is, piles of unsold phones in warehouses.

And she acknowledged there is still worse to come for the phone business: "we expect year over year revenue declines to deepen in Q4 as we work through our Lumia channel position," she said.

Windows Phone's tiny market share is all but a rounding error now and there are no must-have handsets on the horizon.

So is it, as some are saying, all over for Windows Phone? Is it time that Microsoft gave up and gave in -- perhaps building Android phones instead?

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Lumia sales have plunged in recent quarters.

Image: ZDNet / Data: Microsoft

That still seems unlikely, although the acquisition of Nokia's smartphone business was clearly the wrong decision: Microsoft should not be in the smartphone business at any serious scale, and may have now recognised that -- witness the $7.5 billion write-down the company had to take in Q4 2015.

But Microsoft won't be giving up on Windows Phone, simply because smartphones remain such an important computing platform. Smartphones are the devices we interact with most, and they're a bridge from the PC to whatever the future of computing will be, whether that's virtual reality or wearables. Our choice of software -- for communicating, sharing images and more -- is often dictated by the type of smartphone we use.

Microsoft can't ignore any of this and in fact, despite the dire sales, is still pushing Windows Phone forward on a number of -- albeit modest -- fronts.

The company continues to build on Windows 10 Mobile: the latest insider preview came out only recently.

Microsoft also continues to widen Windows 10 Mobile's user base: last month it finally started upgrading Windows 8.1 phones to a version of Windows 10 (although they won't get features like Continuum and Windows Hello).

There have also been a limited number of new phones with a sharper focus on business, such as the Lumia 550, 650, 950 and 950 XL. However, none of these handsets have met with notable success.

And, of course, Microsoft is making its apps available on iOS and Android.

CEO Satya Nadella is keeping to the 'mobile-first cloud-first' motto -- but the suggestion is that the mobile device doesn't need to be Microsoft-branded smartphone: "In this world what matters most is the mobility of a person's experience, not any one single device," he maintains.

There is a small amount of good news for Windows Phone, in the shape of renewed interest from hardware manufacturers: HP, Acer and Vaio are all building Windows 10 phones.

Microsoft bought Nokia with the hopes of becoming a major smartphone maker, but that also had the effect of helping to scare off companies that might have wanted to make Windows phones. Now that Microsoft has dramatically cut back its ambitions, other hardware makers may feel emboldened to try again.

The question is whether Microsoft can afford not to have a presence in the smartphone space, said Ovum Telecoms Research consumer tech analyst Ronan de Renesse. "It's not something they can ignore, they have to continue to produce phones for Windows 10."

Instead, Microsoft will build smartphones not so much to sell to consumers (although it will be very happy if it does) but rather to inspire potential hardware partners -- just as it has done with its Surface devices, which spawned an array of two-in-one laptops. In contrast to plunging Lumia sales, Surface revenues continue to grow, hitting $1.1bn in the latest quarter (Microsoft doesn't detail the number of Surface devices it sells):

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Microsoft's Surface revenues have grown in recent years, in contrast to declining phone revenues.

Image: ZDNet / Data: Microsoft

There have been plenty of rumours that a 'Surface phone' is in development, and likely to hit next year. Could this boost Microsoft's smartphone status?

"Microsoft sees the Surface franchise as a way to showcase Windows 10 capabilities to manufacturers. That has been very successful in the tablet market, so they are trying to mimic the same thing in the smartphone market," said de Renesse.

"What they want to do is to convince guys like Samsung and LG to launch their own Windows 10 versions of their flagship smartphones," he said.

According to smartphone analyst Carolina Milanese, Microsoft is doing the right thing in creating a companion to Surface as well as a device that will show off Windows 10 Mobile's capabilities -- features like Continuum, which will appeal to enterprises.

Milanese said that other hardware makers will probably sit and wait to see what the demand will be at first. However, she added: "Given how things are going in the Android camp when it comes to enterprise, I would not be surprised to see vendors who are trying to make more of a play there to have models running Windows. After all, we have seen that in the tablet two-in-one space, where vendors like Samsung and Huawei have already embraced Windows 10."

It's hard to see the smartphone market as anything other than a two-horse (Android and iOS) race right now. But that might not always be the case. It's still unclear how the PC and the smartphone will evolve and merge over the next few years, for example -- especially in the business market. Smartphones are becoming more powerful, so perhaps something like Continuum (Canonical has similar plans for Ubuntu) could start to gain traction. It makes sense for Microsoft to keep Windows Phone bumping along just in case, in a couple of years' time, a gap opens up that gives it a way back. A Surface phone, if it ever arrives, may help with that, but the chances of a quick turnaround in the Lumia's fortunes look slim.

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