It was not much of a surprise last week when Microsoft announced the deepest cuts in the history of the company’s existence. It was no surprise because it was obvious that the 23,000 Nokia employees Microsoft acquired along with its mobile devices division included a significant overlap with Microsoft’s existing staff. It was no surprise because everyone knew that under Steve Ballmer, Microsoft had grown into a bloated and often ineffective bureaucracy in an industry dominated by much leaner competitors. But there was another reason it should have come as no surprise, and you probably haven’t heard it.
It was also no surprise that the announcement brought out the Microsoft haters and Balmer bashers throughout the media. Sites like BGR wasted no time in characterizing the whole affair as a simple matter of:
(new CEO) “Nadella’s attempt at cleaning up part of the mess that Ballmer left behind in Redmond”.
Unfortunately, a similar reaction was found almost all over the web, with most “analysts” parroting a similar line – this was all due to the need to fix Balmer’s error of buying Nokia.
Before diving into why this a colossal load of nonsense, let’s take a moment to think about the human cost of today’s announcement. 18,000 people losing their jobs is a terrible thing to contemplate. For each of them, and their families, it matters little why they are losing their job, only that they and their families are now exposed and vulnerable in a world which probably offers fewer opportunities for them than when they started working for Nokia or Microsoft. That is a terrible hand to be dealt. Many of those people worked hard to get their respective companies to the heights they attained, and they deserved better. Better management, better success, and a better future. We should thank them for how their efforts enriched and improved our lives, and hope they and their families recover quickly from this terrible blow. Thank you to all of them.
I’m no apologist for Balmer, no-one will ever claim he didn’t mess up mightily when he squandered Microsoft’s massive lead in mobile computing by failing to emphasize development of Windows Mobile, and left the door open for Apple to polish up what Microsoft had pioneered into a more consumer friendly form. As colossal a mess up this was, at least he figured it out (just) before it was too late, and was willing to spend a lot of Microsoft’s money to rescue its future. And spend he did. When Windows Phone failed to take off as hoped, it became apparent that Nokia’s commitment to the platform was the only thing keeping it alive, however this was a huge exposure.
Nokia itself was dying, a victim like Microsoft of its Management’s failure to understand the changes in the mobile phone market.
Its sales, revenues, and stock were going from sliding to falling, and their own gambits in both “advanced” Feature phones and Smartphones were failing.
If Microsoft didn’t do something to ensure the survival of the Lumia line, Windows Phone, and Microsoft’s mobile future, would die on the vine. It took a lot to convince everyone involved to let Microsoft acquire Nokia’s handset business, but doing so saved both Microsoft’s and Nokia’s future, while changing them forever at the same time. The 5.5 billion Euro deal was conducted with the fate of both organizations on the line. It was inevitably going to be messy. It was obvious that there was a lot of overlap between them, and no company can carry thousands of people doing the same job. Massive layoffs were inevitable, and the 12,500 people who were formerly Nokia employees have borne the brunt of them, dwarfing the 5,500 longtime Microsoft employees who will also be getting the axe. Most of the latter are a part of an effort to reduce the management bloat that Ballmer created, but the bulk are associated not with one of Balmer’s “mistakes”, but rather his final, Hail Mary master stroke of acquiring the handset business from Nokia.
Looking at Nokia’s handset business, it becomes rapidly apparent why Microsoft had to cut deep in order to save an otherwise dying business. In 2012, Nokia sold 86 million phones, of which 70 million were non-touchscreen “feature” Phones. Amazing as it may sound, Nokia was second in terms of the number of mobile handsets sold worldwide, running neck and neck with Samsung. In 2013 the number of Feature phones was in a steep decline and their touch-screen “Feature” phones, their ASHA line, was on the rise, however neither this nor the modest increase in Lumia sales could arrest the precipitous fall of Nokia’s sales. Which, although still second in the world in 2013, were down 25% from 2012.
With their sales numbers in free fall, and the bulk of sales being very low margin phones (the average selling price of their “Upscale” ASHA Feature phones was only $US56 in 2013), Nokia’s handset business was quite simply unsustainable. That fact alone, means that the 23,000 Nokia Employees who worked in their Handset division, were all at risk of losing their jobs. And it wasn’t the first time either. In 2012-2013 Nokia itself laid off of a total of 24,500 people, double Microsoft’s recent cuts, while posting record losses. That’s how badly their management had allowed their mobile business to deteriorate. Clearly, making Lumias, even subsidized by Microsoft, was never going to preserve all of the rest of the jobs in the handset division. Microsoft’s purchase secured the supply of Lumia phones, and with it, the future of Windows Phones in general, but it could do nothing to save Nokia’s Feature phone business. Far from Microsoft causing these layoffs, each and every one of the remaining (former) Nokia handset employees should be saying thank you to Balmer and Microsoft for preserving the viable part of their company. Nokia’s Management were the ones to let them down.
There was no way Microsoft would keep the failing handset business going all the way to the bottom. So, was buying all of the Handset division from Nokia “Balmer’s Folly”? I don’t think so. To begin, with its not likely that Nokia or the Finnish regulators would agree to selling off bits and pieces of its handset division.
And even with sales falling, its possible that Samsung might have been willing to buy Nokia’s handsets in order to add the feature phone business to its own, or to shut down and try to transfer Nokia’s customers to themselves. Its also quite possible that Google might have been willing to buy it, just to strangle the threat of Windows Phone in its cradle. Both scenarios would have meant the end of Windows Phone, so Microsoft could not permit either to come to pass.
If there is a silver lining to the deal, it’s that although Nokia’s feature phone business was dying, Microsoft can still reap considerable value from it. First of all, Nokia’s feature phone business wasn’t without revenue, and when you cut the bottom line by 12,500 people, its possible it will generate a positive cash flow for a few years at least. But the most important value for Microsoft is that they now have a direct line to the 250 MILLION people who bought a Nokia handset in 2013. Think about that number for a minute. Add in the 330 million people who bought a Nokia phone in 2012 and you have an amazing customer base looking to find a way to move up to the Smartphone world if an affordable handset were available. And if Microsoft gets itself in gear, there will be Nokia branded, inexpensive Lumia smartphones to sell to them.
Boy I love my Lumia 1020 and can’t wait for an updated version, but the sales of Windows Phones are driven, as are Android, by the bottom and middle of the market. The Lumia 500 and 600 series have already shown how well they can do this when people looking for an entry level smartphone are exposed to Windows Phones that are priced in their range. Can Microsoft find a way to get more devices into his part of the market? Well, to do so will require some very careful value engineering. Creating a handset that can sell for $US50-60 unsubsidized is not going to be easy, but if they get even close to that number, and have the Nokia name on it, they will have hundreds of millions of loyal Nokia Feature phone customers willing to give it a try. The Lumia 500 series has been a great start, and if Microsoft keeps pushing, they should be able to produce a 400 series that meets many of these customers needs. Perhaps co-marketed with one of the budget-oriented OEMs that have steamed to Windows Phone since the OS was offered royalty-free.
Regardless of who makes them, If Microsoft hadn’t bought Nokia, nearly a half a billion Nokia customers might all be looking at their aging Nokia-branded Feature Phones, with only cheap Android phones as their replacements. So – Balmer’s Folly, or a masterstroke that saved Windows Phone and still represents one of its best opportunities for the future? To me, its clear.