How Microsoft's CEO sees growth for Windows Phone and Lumia

Nadella signals dual-use function coming to phones, confirms single Windows OS for all platforms

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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.

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen or subscribe to Matt's RSS feed. His email address is mhamblen@computerworld.com.

See more by Matt Hamblen on Computerworld.com.

Copyright © 2014 IDG Communications, Inc.

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