With Nokia, Microsoft is showing it's not afraid to make bold moves. Just not the right ones

After making a decisive move in mobile by buying Nokia's handset business, Microsoft is making one step forward and two steps back.
Written by Jo Best, Contributor on

Like Nokia's decision to start making Android phones, Microsoft's decision to stop selling them — and the wider restructuring the move was part of — seems a mixture of business sense and magical thinking.

Nokia, before its devices and services arm was bought by Microsoft, began working on Android devices. Quite when that work started we don't know, but as the first devices in the X line launched in February, we can assume it would have been somewhere between February last year and August 2012. That suggests the decision to explore the OS was taken before Nokia began negotiations proper with Microsoft over the sale of the handset business (a theory that chimes with reports that the Nokia-Microsoft negotiating table had an Android-powered Lumia placed on it).

So Microsoft wanted Nokia's handset arm, but not necessarily it's Android experiment: Microsoft's focus was, and is, pushing Windows Phone. It needs the OS to take off so it can sell software on top of it. It also needs those services to succeed on other mobile platforms, including Google's, as well, but that the company needed to produce Android handsets to achieve that doesn't - it seems - necessarily follow.

As the Nokia acquisition closed after the X launch, chances are Microsoft had no option but to put a brave face on the Android devices it was now selling. Stephen Elop, then still a Nokia employee touted the handsets as an "on-ramp" to Lumia, and as a "feeder system" for Microsoft services.

Selling consumers low-end devices today in the hope of moving them onto more expensive devices tomorrow is a sensible move. However, it did then, and still does now, beg the question of whether Nokia needed a range based on a forked version of Android to do that.

To do it properly would mean another push to get developers onboard, another charm offensive to get big name app-markers to join the party, and more integration efforts with Nokia's other products to make sure that on-ramp really does work. These are all things Microsoft has found difficult with Windows Phone, which has had its full attention: it was unlikely to pull off with the X line, which didn't.

The suggestion was that the X range would be chiefly aimed at emerging markets. The 'on-ramp' rhetoric, though it made sense, seemed retrofitted to the fact of the X's existence — if Microsoft wanted an on-ramp, it already had one in the form of the Asha and S40 ranges, both of which are extremely popular in emerging markets.

Microsoft's decision to do away with X appears to have been a swift one — the company released second-generation X devices last month, and then killed them off a couple of weeks later. It may have been swift, but it was a solid decision — why give yourself the headache of building another "feeder system" when you have a perfectly good one at hand?

That's where the thinking gets murky. In the middle of the huge restructure and mass redundancies Microsoft announced yesterday, it emerged that Nokia's old feature phone business — which makes the Asha, Series 40, and Series 30 handsets — was also for the chop.  

Like the X u-turn, the decision to shutter the feature phone business came not long after protestations by Microsoft that Asha and its fellows could also serve as a foundation on which Microsoft could later build with Windows Phone, migrating customers gradually onto smarter, and more expensive, devices. Elop even used the phrase "on-ramp" to describe the Asha business too.

But while the feature phones are still riotously popular in many of the markets Microsoft should want to play in, the business has been in decline for some time as the non-smartphones had to face competition from cheaper and cheaper Android devices.

So, again, that Microsoft decided to kill off that particular side of the business is not a surprise, and viewed from a certain angle makes a good deal of sense: why bother trying to build an on ramp to your desired platform in the first place, why not just get consumers on there straight away? Ditch Asha et al, and get developing markets onto Lumia first up?

But the thinking gets cloudy once again. In a memo Elop sent to workers yesterday when it was announced Microsoft would layoff half of the 25,000 Nokia workers it acquired, there were no specifics on emerging markets, though the word "affordable" was mentioned several times. The two aren't necessarily synonymous — the Lumia 520 is highly affordable for a smartphone, but not an emerging markets device per se.  

Elop's woeful opacity continued when it came to geographical differentiation: "we plan to select the appropriate business model approach for our sales markets while continuing to offer our products in all markets with a strong focus on maintaining business continuity. We will determine each market approach based on local market dynamics, our ability to profitably deliver local variants, current Lumia momentum and the strategic importance of the market to Microsoft," the memo said.

Erm, right.

Emerging market dynamics present all sorts of interesting challenges for Microsoft now. Though Microsoft is now pursuing both volume and affordability, it has scaled back the team in charge of such efforts, saying "in the very lowest price ranges, we plan to run our first phones business for maximum efficiency with a smaller team".

The company also wants to use Windows Phone as a way of getting more other Microsoft services and software into the hands of users. No great change there, of course, but having just laid off half of those former Nokia employees it hired, the task of getting more operators onboard with pushing Windows Phone presumably gets no easier.

Operators are so much more key to mobile success in emerging markets than they are here: if Microsoft wants to get more users there on its services, it must make sure they, the devices they run on, and the networks they're accessed over, are affordable (there are interesting emerging business models to be worked out here), and that data connections are reliable and ubiquitous. Operators will be make or break here.

Emerging markets bring their own engineering problems too — making a device robust enough to withstand days without power (try and imagine Windows Phone doing that. No, go on, try) or compressing data so web browsing over a feeble data connection is still feasible, but having decided to do away with Nokia's Oulu facility and Beijing counterpart, it may lose out on much of that emerging markets smarts.

Microsoft has its own problems too that could hamstring efforts here. Many of the large emerging markets, such as China, Indonesia, and India, are all dominated by OEMs whose names are unfamiliar to the west. Along with bigging up its own devices, it would make sense to try and court more of them to begin working on more Windows Phone models.  

It's not really an area Microsoft's excelled at in the past: when Windows Phone launched, LG, HTC, Samsung, and others all brought out Windows Phone-powered models. While all three are still on Microsoft's Windows Phone OEM list, they no longer  make much noise about it. Securing more love from local OEMs would not only mean higher volume, but also deliver Windows Phone into the affordable segment Elop craves.

It's made some efforts here already, having secured the support of Karbonn, set to launch three Windows Phone devices this quarter, and Lava recently, but a great deal more is needed. Google has already has the same companies and more signed up to deals that will see them launch more Android models cheaper and faster, thanks to Android One.

Google is going after the emerging markets hard, locking consumers into its own apps and services and locking Microsoft out of those users' digital lives. Microsoft now has to counter that threat with a stripped down affordable phones team, huge amounts of Nokia expertise leaving the building, and presumably morale heavily hit.

That said, it's not even clear from Elop's memo how much of a priority emerging markets are any more. Elop said that Microsoft will "focus on acquiring new customers in the markets where Microsoft's services and products are most concentrated", which wouldn't necessarily appear to be the developing world. I can only hope that wasn't Elop's message here, for such a mobile strategy would be madness.

Microsoft buying Nokia was, I still believe, a sensible move on the company's part and no one was under any illusion that redundancies and other changes wouldn't be part of that.

It wasn't perhaps expected that having bought what appeared to be so many useful assets when it acquired Nokia, it would do away with many of them and push ahead with a strategy that no longer quite has the props it needs to stand up. With its latest round of cuts, Microsoft has kicked customers right off its on-ramp.

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