Microsoft reveals bankruptcy of devices strategy by dumping Nokia feature phones

Smart and dumb at the same time, but for entirely different reasons, say analysts

Microsoft was right to ax the feature phone business it inherited when it bought Nokia's handset business for $7.2 billion, analysts said today.

But while it was the smart move, it was also incredibly dumb: The vast portion of Nokia's unit sales were not in Lumia smartphones, as Microsoft might have people believe, but in the ultra-cheap old-style phones that are still used by billions around the world.

"In my opinion, most, if not all, of the investment in Nokia went for naught," said Jack Gold, principal analyst at J. Gold Associates, in an email reply to questions today.

Why? Because there's little money to be made in so-called "dumb" phones, which in polite company are called "feature" phones, or even simply "mobile" phones to differentiate them from touch-based, computing-in-a-pocket smartphones.

"I don't think the new management has the desire to be a full-service competitor in the smartphone market, and certainly not in the volume feature phone market where it's even harder to make money," said Gold in explaining his take. "Nadella and company looked at the business model for phones [of any kind] and decided, rightly so in my opinion, that there is very little if any money to be made there."

Along with the job cuts Microsoft announced last week -- showing the door to about half of the former Nokia employees -- the company also said it would bail out of the feature phone business. On Thursday, BGR India published what it said were excerpts from a memorandum penned by Jo Harlow, who heads Microsoft's phone side, part of the Devices group led by former Nokia CEO Stephen Elop.

"With the clear focus on Windows Phones, all Mobile Phones-related services and enablers are planned to move into maintenance mode, effective immediately," Harlow wrote. "This means there will be no new features or updates to services on any Mobile Phones platform as a result of these plans."

No services means no phones, not the kind of feature phones that Nokia has sold, and still sells.

The replacement for the dumped feature phones will be Lumia-branded, low-priced smartphones running Windows Phone. "We will be particularly focused on making the market for Windows Phone," Elop said in his public message to the Devices group on July 17. "We plan to drive Windows Phone volume by targeting the more affordable smartphone segments, which are the fastest growing segments of the market, with Lumia."

He didn't mention the feature phone side of Nokia; nor did CEO Satya Nadella in a separate, shorter email to employees.

None of the analysts contacted by Computerworld was surprised by the vanishing act. "I've expected this," said Sameer Singh, of Tech-Thoughts. "Nokia's feature phone business did have high volumes, but the profit margins had become razor thin because of strong competition."

"Dumping the mobile phone business makes a lot of sense," echoed Charles Golvin, founder of Abelian Research and a former Forrester analyst. "Microsoft's interest is in driving the Windows platform and Microsoft services, and while it might have been a possibility to customize those services to work on feature phones, they're not a growth market. So the likelihood of doing that on more basic phones was dim, and not worth the effort."

The exit from Nokia's feature phone business was not what Microsoft talked about last year when it announced it would buy the Finnish firm's handset division and license its broad patent portfolio. Then and later, lame duck CEO Steve Ballmer described the feature phones as potential "on-ramps" to more capable, and presumably more expensive, smartphones.

"I've never believed in feature phones being an on-ramp for Microsoft. Emerging market consumers have been dumping Nokia feature phones for Android smartphones for a while and I'm not sure that could have been reversed without incurring major expenses," said Singh.

Golvin concurred. "It's been demonstrated that customers in emerging markets are interested in and willing to use smartphones, providing they're priced appropriately and the associated operator services are priced reasonably," he said.

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