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Microsoft's cuts to smartphone division underscore new mobile imperative

What does Microsoft's curtailment of its smartphone division say about the company's mobile future? Also in Searchlight: Study links cell phones to cancer; Silicon Valley billionaire bankrolls lawsuits against Gawker.

Microsoft ran out of luck with its ill-fated smartphone venture.

We learned this week that Microsoft is dialing back its struggling smartphone division even further by cutting 1,850 jobs -- most of them in Finland -- and taking a $950 million loss in the process. The job cuts come a week after Microsoft abandoned the low-end smartphone market when it sold its feature phone business to manufacturing giant Foxconn's FIH subsidiary.

"Since 2011 or 2012, Windows' market share, as a portion of total smartphones sold, has hovered at around 2%," said Tuong Huy Nguyen, principal research analyst at Gartner Inc. A Gartner report published this month showed Windows phones now account for only 0.7% of market shares. "Maybe they finally realized ... that it's going to be nearly impossible to get a substantial foothold -- at least in the phone market -- with their operating system," he said.

Microsoft's decision was inevitable, according to Nguyen, but it nevertheless speaks to the current digital landscape and emphasizes a shift in the industry's overall approach to mobile.

"It's no longer about the hardware -- at least in the smartphone world," Nguyen said. "It's very commoditized. Everyone has to move toward services and applications."

Jack Gold, principal analyst at J.Gold Associates, agrees.

"Where [Microsoft is] still in it, and should play, is services that empower the Android and iOS ecosystems," Gold told Computerworld. "It should not have ever been in the cut-throat hardware business."

Microsoft found out the hard way that hardware is a tough business to crack into, but it's not alone -- it's the latest in a string of high-profile smartphone flops. Facebook partnered with HTC in 2013 on the HTC First phone featuring the custom Android interface Facebook Home, and it tanked. Amazon's recent foray into smartphones ended just as badly.

None of those companies -- Microsoft included -- has given up their mobile ambitions; they've just refocused them.

"These are all experiments with people trying to figure out what sticks," said Paul Heckel, director of digital strategy at mobile consulting firm Solstice Mobile. "It amounts to trying to be good at too many different things instead of sticking to core capabilities and core competencies."

By phasing out its smartphone division, analysts said that Microsoft can focus its energies on its popular apps for iOS and Android and its virtual assistant Cortana, as well as its much-touted Continuum feature that allows cross-device integration. 

The company said it would continue to develop the Windows 10 mobile operating system and support its Lumia smartphones, and hinted in a company-wide email that it will still sell phones to corporate customers.

What's the next mobile imperative for Microsoft and other tech companies? Heckel gives his take:

"It's around conversational user experiences driven by digital assistants and artificial intelligence," he said. "The next thing we need to be looking at very closely is who is going to create that intelligent interaction layer on top of existing applications and platforms."

He thinks Microsoft has an important role to play in this intelligent mobile future, thanks in large part to its cognitive services like Cortana that centralize mobile engagement and interaction. Microsoft is already trying to push Cortana to as many endpoints as possible -- everything from Android and iOS apps to the Skype messaging platform and Xbox.

What Microsoft got wrong

Windows phones suffered from an app problem. "It's not necessarily about the number of apps -- but in a way it kind of is," Nguyen said.

He puts it this way: Microsoft needed more users to convince app developers to come to the operating system, but it was hard to get users to come when developers weren't developing apps for it.

But Microsoft's mobile strategies have been playing catch-up ball from the beginning, Nguyen said. He traces the company's misplaced efforts all the way back to its Pocket PC in the early 2000s, which basically featured the desktop version of its operating system on a small screen. The company pushed that device for years until Apple's introduction of the iPhone showed what an OS should look like on that medium.

Microsoft is trying to stay relevant in mobile, which is the biggest and most relevant computing platform in the world.
Paul Heckeldirector of digital strategy, Solstice Mobile

More recently, Windows smartphones aimed for the higher-end of the market, which didn't do it any favors, Nguyen said. The tech giant may have squandered its phones' mass market and emerging market potential by focusing on flagship phones.

Heckel thinks that Microsoft started looking to invest their mobile efforts elsewhere even before announcing their smartphone division rollbacks. He cited key moments that are indicative of Microsoft actually hedging against its own mobile investments. One is its $70 million investment in 2015 in Cyanogen, known for its third-party, non-Google Android OS. Microsoft hoped to embed its products into Cyanogen's version of Android. The other piece of evidence is Microsoft's acquisition and open sourcing of the Xamarin development platform, which enables developers to write code and deploy to Windows, Android and iOS.

"Microsoft is trying to stay relevant in mobile, which is the biggest and most relevant computing platform in the world," Heckel said.

CIO news roundup for week of May 23

The fall of Microsoft's smartphone division wasn't the only big news this week. Here are other tech headlines that made news:

  • Do cellphones cause cancer? A new study released by federal scientists has found evidence that exposure to cellphone radiation can increase the risk of certain cancers in rats, reigniting safety concerns. The study is still ongoing and experts' early reactions suggest that citizens should not ditch their smartphones just yet.
  • Facebook and Microsoft are bridging the great divide -- the Atlantic Ocean, that is. The tech giants are partnering to lay a massive underwater cable across the Atlantic from Virginia to Spain. The cable will shuttle data at a bandwidth rate of 160 terabits per second and will allow the companies to become more efficient at moving vast amounts of information to and from data centers and network hubs. Google already has projects in the works to connect several locations around the world through underwater cables.
  • Remember PayPal co-founder and early Facebook backer Peter Thiel's run-in with Gawker over the media outlet's "outing" of him as gay? Thiel certainly hasn't forgotten, and he has taken his personal vendetta against Gawker to new heights by secretly funding Hulk Hogan's well-known lawsuit against the controversial media outlet -- and likely other cases. Outside funding on lawsuits isn't illegal, but it has raised some questions. The Silicon Valley billionaire said he considered his financial backing of the cases against Gawker to be "one of my greater philanthropic things that I've done." Anti-1%-ers think differently.
  • Google is betting big on modular phones with its Project Ara. Next year, the company will start selling a smartphone that lets you swap in interchangeable parts to get different abilities like extra battery and a better camera or a speaker. The goal is to create a truly customizable phone, but it's too early to tell whether consumers will latch on to the idea. Recent smartphone flops -- ahem, Windows phones -- underscore the difficulty of getting it right and appealing to the mass market.

Check out our previous Searchlight roundups on the theme of "coopetition" at MIT CIO and Viv, the new virtual AI assistant.

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