Microsoft CEO Satya Nadella announced that the company would be scaling down its mobile phone hardware business. Nadella called the company’s dramatic course change a “restructuring.” He used phrases like “effective and focused” and “long-term reinvention and mobility.” But make no mistake: Today’s announcement (7,800 layoffs and a $7.6 billion write-off, mostly related to Microsoft’s phone business and its purchase of Nokia last year) is a letter of surrender.
The battle for smartphone supremacy is over. Actually, it’s been over for a while. It should surprise no one that the smartphone market is all but set in stone. Give Nadella some credit for seeing the writing on the wall, though to be fair it was basically written in huge letters and lit by floodlights.
Microsoft is hoping the age of the smartphone is over, and it's almost certainly wrong.
And give him yet more credit for working swiftly to bring the company’s most indispensable services, like Outlook and Word, to the devices people already use—devices like the iPhone, which now stands virtually alone at the top of the smartphone heap. As Samsung, HTC, and others have found, competing with the iPhone on its own turf is pointless; even if you make a phone as good, it won’t sell. Most people who want that sort of phone just buy iPhones. You can go big like the Galaxy Note 4, or you can go different like the Galaxy S6 Edge, but the default answer to the question, “which phone should I buy?” is the iPhone. It just keeps winning.
The rest of the world—and the dramatic majority of the market—has been completely overtaken by Android phones, which have somehow managed to get both cheaper and better, simultaneously and at ridiculous speeds. The Moto E is terrific, and it’s $129 unlocked. Companies most people have never heard of, like Alcatel, OnePlus, and Blu, make excellent phones almost anyone would like. Microsoft makes a few phones that are even cheaper, like the Lumia 520, which Microsoft has said before was the best-selling Windows product on the planet, period. But all you have to do is look at the chart of price and quality of Android devices, and you can’t help but think we’re weeks or months away from a kickass, $50 Android phone that no Lumia can hang with.
The Future of Surface
To be fair, Microsoft isn’t totally out of the phone game. Microsoft will probably make a Surface Phone, or something like it. Nadella even teases the idea in his memo, mentioning giving “Windows fans the flagship devices they’ll love.” And Surface, by all accounts, is still important to Microsoft. But whatever flagship device does come out of Redmond is almost certainly going to be something like Google’s Nexus program, made not to sell in any volume but to give developers something to build with. And, hopefully, to inspire just enough envy in its hardware partners that they build something awesome. Don’t expect huge marketing campaigns or gigantic global carrier rollouts. Microsoft wants its partners to build hardware that runs its software. That’s what it’s always wanted.
It’s different now, though, than it was with PCs in the ’90s. Android is free to use, it’s a technically and aesthetically excellent operating system, and it has unstoppable momentum around the world. The same partners Microsoft would need—HTC, Sony, Samsung, and LG—have until now showed almost zero interest in the platform, and this announcement doesn’t exactly make it sound like there’s been closed-door progress.
Even with the full force of Microsoft’s resources behind making a dent in the market so thoroughly sewn up by Android and iOS, Windows managed only low-single-digit smartphone market share. Now that it has so ruthlessly and completely stripped away those resources, how can it even pretend to compete?
It can’t, and soon enough, it won’t. That’s a huge problem for Microsoft, whose whole case for Windows 10 hinges on its ability to be a single platform across many devices—including, critically, devices that fit in your pocket. If no one builds Windows phones, and it now seems safe to say no one is going to, then that whole idea collapses.
What Nadella’s memo implies is that the smartphone war may be over, but Microsoft sees many more, equally disruptive revolutions upon us. The company is also focused on the Internet of Things, augmented reality, cloud processing, and virtual assistants. Those things are the future after phones, and Microsoft is positioning itself well in all of those places.
Unless, of course, your phone isn’t about to go away, but is instead about to become the centerpiece of everything—the remote for your lights and coffeepot, the engine for your virtual reality experiences, and the microphone in your pocket you use to talk to your assistant. That looks more and more like the future that’s just around the corner. And that’s a future without much room for Microsoft.