Microsoft's Restructure Is Going to Help Focus Its Vision on Software

NEW YORK (The Street) -- Satya Nadella, Microsoft's (MSFT) CEO, announced the layoff of 7,800 Microsoft employees globally in a public-facing staff email today. Most of the jobs that are being phased out over the next couple of months are related to the phone sector of the business.

In doing so, Nadella seemed to be confirming what many analysts predicted several years ago -- that the company was stretched too thin.

Nadella's public announcements about company direction also included the news that Microsoft will take an impairment charge of about $7.6 billion in assets associated with the acquisition of Nokia's devices and services business in addition to a restructuring charge of between $750 million and $850 million. "I am committed to our first-party devices; however, we need to focus our phone efforts in the near term while driving reinvention," Nadella wrote.

"The restructuring in the phone business is a signal that this business is not performing anywhere near as well as Microsoft had hoped, and that Microsoft needs to be much leaner and more focused than it has been," said Jan Dawson, chief analyst at Jackdaw Research. Dawson also believes that this announcement is part of a much larger strategic move for the company. "It's likely also the first step in a slow winding down of the mobile devices business in favor of either abandoning mobile entirely or at least ceding much of that opportunity to third parties."

Others agree that this is a signal of a clear shift in direction, but disagree on what that means for the company.

"I don't think it will be the end of Windows Phone," said Holger Mueller, principal analyst and VP of Constellation Research. "It may mean that Microsoft will be less of a manufacturer than an operating system player. And then it looks like [Microsoft] can leverage more Windows 10 assets across devices, which means less people will also be needed for the pure mobile software side."

Windows Phone, although experiencing a slight growth in 2014 and even as of Q1 2015, was completely dominated by Google's (GOOG) Android who holds a 78% of the global market according to research group IDC, followed by Apple's (AAPL) iOS at 18.3%. Windows Phone accounted for only 2.7% of the global smartphone market, an increase from 2.5% the year before.

This announcement also seems to be a significant announcement about the direction of the overall business, especially coming on the heels of the company's recent announcement to sell its display ad business to AOL  (AOL) the end of June. "That's what this is really all about," said Dawson. "A recognition that Microsoft has had fingers in far too many pies. Nadella is finally making the cuts and changes needed to focus Microsoft on the things it can do both well and profitably."

But beyond the specific direction of the company, it is also clear that Nadella is looking at the bottom line for clear winners and losers in rapidly evolving, and for Microsoft at least, unprofitable areas of the business. "Nadella seems to be saying, above all, that Microsoft can no longer afford to indulge those businesses that aren't performing and aren't central to the company's future strategy," said Dawson. "Given the headwinds Microsoft's business faces over the coming years, it needs to become much more disciplined about investing in the areas that have potential to drive growth and profitability."

For the entire fiscal third quarter, Microsoft generated $1.4 billion in phone-related revenue, selling 8.6 million Lumia units.

Nadella's comments clearly suggest the different places Microsoft is focusing on, including search. "Bing will now power search and search advertising across the AOL portfolio of sites," he announced this morning. "Concentrating on search will help us further accelerate the progress we've been making over the past six years. Last year Bing grew to 20 percent query share in the U.S. while growing our search advertising revenue 28 percent over the past 12 months."

Yet for all the cosmetic changes, Mueller for one believes that this announcement does not really change anything at the company.

"Windows and Office are key. We see a [Microsoft] that is more about software on all relevant platforms than about owning and manufacturing its own platforms," he said. "I think it is part of the Nadella strategy to focus on core software assets and de-emphasize some of the legacy. It's a departure of the Ballmer strategy."

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