During an earnings call this week, Microsoft CEO Satya Nadella repeatedly promoted Lumia smartphones running on the Windows Phone platform. The call was just five days after the company announced a record 18,000 layoffs that raised concerns about Microsoft’s long-term commitment to its phones.
As he answered questions from analysts, Nadella described a number of coming improvements to Windows Phone and Lumia hardware that include a dual-use functionality to separate work and personal data. As long expected, he also committed to a single Windows operating system for devices of all screen sizes, down from three, in the next release.
Nadella also described ways that the company was differentiating Windows Phone from competitors by developing apps and features like the new Cortana digital assistant as a means to improve user productivity.
Still, Nadella was somewhat equivocal at one point about the future of phones at Microsoft. “We will responsibly make the market for Windows Phone,” Nadella said. “However, we’re not in hardware for hardware’s sake … Going forward, all devices will be created with the explicit purpose to light up our digital work and life experiences.” He also reiterated Microsoft’s — and his — mantra “to define our core as the productivity and platform company for a mobile-first, cloud-first world.”
Analysts said Nadella’s remarks illustrate why it’s important for Microsoft to continue selling phones, even though Windows Phone has a small market share.
“You cannot have a ‘mobile first’ approach without a phone,” said Ryan Reith, an analyst at IDC . “That doesn’t mean Microsoft has to own the phone, but the platform has to work. I believe they will stick with owning the phone because they went and purchased the (his emphasis) Windows Phone hardware manufacturer … Overall, it’s a sticky subject.”
Carolina Milanesi, chief of research at Kantar WorldPanel, agreed that Microsoft can’t say it wants to be “mobile-first” without a phone.
“For now, showing off what the Microsoft ecosystem — and not just the OS — delivers depends on the hardware they can deliver,” she added. “Unless sales pick up, it is hard to get device makers to trust that it is worth investing in the ecosystem.”
Nadella’s earnings-call comments came less than a week after Microsoft described plans for layoffs of 14% of its work force. Those layoffs will include 12,500 Nokia workers who came aboard after the $7 billion purchase of Nokia was finalized in late April.
When the layoffs were announced, Nadella also said Microsoft would drop Android-based Nokia X phones. Subsequently, reports surfaced that Microsoft has also discontinued the Nokia Asha line of low-cost feature phones.
What Nadella said
During the earnings call, Nadella described how a team of workers is developing dual-use functionality for Lumia smartphones to separate work and personal data. He also indicated a greater focus on the productivity features in Cortana, the digital personal assistant in Windows Phone 8.1, as well as Office Lens, an app introduced in March to use the phone’s camera to take pictures of whiteboards and documents to make them readable to save in OneNote.
Nadella also touted Microsoft’s Universal Apps initiative, first introduced at the Build conference in April, as a way to entice developers to build apps that work across desktop, tablet and, certainly, phone platforms.
Recognizing that Windows Phone has barely reached 4% market share in the U.S. and more than 10% in some European countries, Nadella talked generally about how Microsoft will focus on “productivity scenarios” to differentiate Windows Phones from other phones to improve sales.
“A key place where we’re going to differentiate is looking at productivity scenarios or these digital work and life scenarios that we can light up on our phone in unique ways,” he said, in response to a question.
As an example, he brought up Office Lens as a “unique scenario” for taking a picture of anything to have it automatically recognized with optical character recognition software and stored in OneNote. He added that screen innovations in Surface tablets “show us the way, that there is a lot more we can do with phone by broadly thinking about productivity.”
Future phones, he said, will have innovations like note-taking with a stylus and a high pixels-per-inch count as seen in the Surface Pro 3.
While Lumia phones with Windows Phone 8.1 have Office software capabilities, Nadella said the coming focus on productivity “is not about just Word or Excel on your phone … It is about thinking about Cortana, and Office Lens, and those kinds of scenarios in compelling ways.”
Nadella wasn’t specific about when a dual-use software component will come to Windows Phone, but he did say he wants Microsoft to “have the software to have the smarts about separating out the state, caring about IT control and data protection, while … an end user gets to have the experiences that I want. That’s how we are thinking about harmonizing those digital life and work experiences.”
Dual-use smartphones are not new. BlackBerry introduced the concept with the Z10 in early 2012 with its BlackBerry Balance software. Samsung’s Knox enterprise-focused software also provides dual work and personal software for its Android phones, and Google picked up on the same idea in its coming version of Android, dubbed “L,” for later this year.
Nadella also said that with Cortana users will have “productivity experiences that will go beyond individual applications to deliver ambient intelligence that spans applications.” For example, with the new Lumia 635 smartphone, a phone user can use Cortana to leave a voice message, such as, “Pick up milk when I get to the next store” and then use Bing search and Here maps to locate the nearest store. When the user later gets to the store, located with GPS, the phone reminds the user to pick up milk with an audible alert and text message.
Regarding Universal Apps, Nadella described the concept as a way to attract developers to Windows Phones under the “mobile-first, cloud-first” mantra he has laid out. If an app runs on a desktop and can also run on a tablet or smartphone, it gives the developer access to more than 300 million devices, including desktops and laptops, worldwide.
“That’s really the reason why we are actively making sure that universal Windows apps is available and developers are taking advantage of it,” Nadella said.
Many analysts believe the biggest deterrent to the success of Windows Phone is because the mobile operating system has access to fewer than a third of the number of apps available for either Android or iOS.
As expected, Nadella also confirmed that Microsoft will “streamline the next version of Windows from three operating systems into one, single converged operating system for screens of all sizes.” He said more information will be available in “the coming months.”
Microsoft said it sold 5.8 million Lumia-branded phones from the time of the Nokia acquisition to the end of the fourth quarter, and that they contributed $1.99 billion in revenues. Lumia device sales were primarily in the lower-priced Lumia 500 and 600 series, the company said.
Costs related to the acquisition of Nokia resulted in a loss of $692 million on the $1.99 billion in revenues. The deal also reduced profits by 8 cents a share. The Nokia business is now called Phone Hardware within Microsoft. It should break even by fiscal year 2016, Microsoft predicted.
Still, some analysts are skeptical
“Nadella was clear in his direction of Windows, including one Windows for all screen sizes and form factors. I think they still have a future in mobile, but that future is limited,” said Jitesh Ubrani, an IDC analyst.
“That said, in the past, Microsoft was infamous for the infighting that took place between various business divisions. It seems that some of that, probably to a much lesser degree, will still exist. It’s tough to be a hardware player and lock in consumers into your ecosystem when you are trying to expand the services business and appeal to a broad audience on multiple platforms.”
With Windows Phone, Microsoft is trying to play to its strengths with budget smartphones like the low-cost Lumia 530, Ubrani added. “I think this [low-cost phone] strategy is enough to keep them in the running, but I wouldn’t expect any significant changes in the overall market.
Jack Gold, an analyst at J. Gold associates predicted when the layoffs were announced that Microsoft would sell off its phone business within 18 months. After the earnings call, he said he was “skeptical” Microsoft can make its phones profitable by 2015/16 as Microsoft has predicted.
“Microsoft could potentially keep the phones going forever, given they can subsidize the products with profits from other operations,” Gold said. “But it is going to be very difficult to make the phone business profitable, despite comments by Nadella.”
To be taken seriously in the phone OS space, Microsoft has to make it attractive for original equipment manufacturers (OEMs) to build appealing devices, Gold said.
“Some of that will be done by having a unified OS strategy across product categories. But there is a lack of momentum behind Windows Phone right now, and it will be hard to rebuild that. I’m still of the opinion that Windows Phone as a device manufactured by Nokia/Microsoft does not have a bright future, and a spinout or selloff of the Nokia business is likely.”
This article, How Microsoft’s CEO sees growth for Windows Phone and Lumia, skeptics aside, was originally published at Computerworld.com.