“We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem including our first-party device family,” Satya Nadella, CEO of Microsoft said in an email to employees. “In the near-term, we’ll run a more effective and focused phone portfolio while retaining capability for long-term reinvention in mobility.” On July 08, 2015, Microsoft announced one more round of layoffs – 7800 in number, mainly from the Nokia Phone Business, an earlier acquisition by Microsoft’s last CEO, Steve Ballmer, which never took off, as per expectations.
As Microsoft continues to reshape itself under the chairmanship of Nadella, and adjust better to the perceptible shift in IT paradigm, it has witnessed a layoff of about 18,000, which includes 13,000 from payroll on July, 2014, 2100 in September and 3,000 in October, 2014. Most of the people laid off (about 12,500) are from Microsoft’s newly acquired Nokia business, a large part of which is from Nokia’s feature phone manufacturing. When Microsoft acquired Nokia, it was interested to become a competitor for iPhone and Android using Windows smartphones and was never interested in running a feature phone business.
Microsoft is banking on a few growth areas based on the speech from Nadella. They are:
- Cloud Business – Cloud business has seen a revenue growth of 88% last quarter and the annualized cloud revenue has surpassed $8 billion this quarter. Microsoft’s goal is to reach $20 billion revenue in fiscal year 2018. Microsoft’s Azure platform is the key to its success.
- Office 365 and Dynamics – A strong demand exists for both these, with a 74% year over year increase in seats for Office 365 and Dynamics CRM witnessed a growth of 140% year over year.
- Visual Studio tools – Visual Studio tools continue to be a focus area, with decision to consider open source with .net, Visual Studio Online continues to grow at 3.1 million users and there have been 5 million downloads by the Visual studio community.
- Business Analytics and Intelligence – This is a rapidly growing market for Microsoft, and the opportunity is estimated to be about $15 billion.
- Security – This is a key area for Microsoft with an expected $30 billion opportunity.
- Windows 10 release – This is a key strategic initiative from Microsoft. The goal is to have one billion Windows 10 active users by 2018. Windows 10 is also expected to have exciting hardware development from Microsoft’s OEM vendors.
- Hardware – In hardware, Surface and Xbox Gaming continue to be the priority areas, having doubled the Surface revenue to $900 million last quarter, while Xbox users grew 22% last quarter.
- Bing – While this is yet to be profitable, it is expected to be profitable next fiscal year. The advertisement revenue from it has seen a growth of about 21% over the year.
If Microsoft is doing well in these businesses, why would they require to layoff in such a large number and quite frequently? The answer lies in the financial performance of the company overall. Overall revenue was $ 22.2 billion, which is a drop of 5%. Similarly, total gross margin declined by 7%. While operating income declined by 3%, Microsoft ensured to keep the Earning per Share at $0.62 cents, a growth of about 11%, which indicates the company’s interest to give back more to stakeholders, despite losing out on other financials. Gross margin decline is attributed to the decline in performance in the phone business – lower margins from Lumia devices and reduced volumes in non-Lumia phones.
So, after an overall study, it seems that Microsoft has thought of this strategy carefully to reduce its manpower in the phone business. Overall there is a general feeling that the company is too top heavy and needs to be slimmer and more agile to face today’s competition. Also, the particular business of Nokia as such was not profitable when Nokia sold off the division to Microsoft. So, supporting an ailing business for Microsoft has consumed a lot of its productive time and effort without much productivity. It is expected that in the long run, this would help Microsoft, though meanwhile this has an immediate effect on its revenue.
However, Microsoft is not expected to sell off its smartphone business, given the importance of the mobility technology area. The company intends to have a $7.6 billion impairment charge for this business. In addition, the estimated restructuring cost for the phone business would be between $750 million to $850 million.
With the plan to launch Windows 10 for PCs, smartphones and other devices, Microsoft is planning to make an impression in quite a different way in this segment. Analysts predict however that Microsoft could soon realize the missteps in the smartphone business with a large write down on the value of its Nokia acquisition. This accounting change itself could amount to several billion dollars.
Software companies have reached a stage where giants like Microsoft, which were the growth engines for the last two decades, are resorting to reduction in staff. The silver lining in the dark cloud is however their requirement for new skills, and being abreast of new skills would help survive this ordeal.