By Jay Greene 

Microsoft Corp.'s decision to further dismantle its shrunken mobile phone operations leaves the software giant betting that it can revive its fortunes in a critical market segment by focusing on the one area where it still may have strength: securing and managing mobile devices on corporate networks.

The company on Wednesday said it would lay off 1,850 workers and take a charge of about $950 million in its smartphone hardware business. Combined with a previous write-off last year, it has now taken charges that slightly exceed the $9.4 billion Microsoft's previous chief executive, Steve Ballmer, spent in 2014 to acquire Nokia Corp.'s handset business, a move intended to secure its position in the phone market.

That capitulation reflects the conundrum facing Mr. Ballmer's successor, Satya Nadella, who took over two years ago, as he runs out of options to bolster Microsoft's standing in mobile technology. His new strategy aims to help information-technology managers cope with the increasingly central position of smartphones in corporate networks. The company is betting that corporate customers will want to use Microsoft's technology to lock down and control devices on their networks.

In a statement, Mr. Nadella also touted its Continuum feature, which enables a smartphone running Windows 10 to function as a surrogate PC when connected to a monitor and keyboard.

Microsoft must establish its Windows operating system on a substantial portion of smartphones or accept a diminished presence in the technology landscape, where mobile devices outnumber personal computers -- and it may not get another chance, said Forrester Research Inc. analyst Julia Ask.

"It's their last play," Ms. Ask said. "They've got a tough road ahead of them."

The path includes both hardware and software. Windows 10, the latest version of Microsoft's flagship operating system, is designed to run on smartphones as well as PCs and other devices. Microsoft currently sells three smartphones under its Lumia brand, and on Wednesday said it would continue to support those models.

"[We're] scaling back, but we're not out," Terry Myerson, executive vice president of Microsoft's Windows and Devices Group, wrote in an email to employees on Wednesday.

However, it would be hard for Microsoft to be much less in the phone business. Research firm Gartner Inc. last week reported that sales of smartphones running various versions of Microsoft's Windows software amounted to 0.7% of the market in the first quarter of 2016. A year earlier, Windows' share of sales came to 2.5%.

The streamlined strategy is a sharp departure from the approach of Mr. Ballmer, who focused first on a phone operating system for the consumer market, then on one for the business market, with little success. His "devices and services" strategy required Microsoft to build the gadgets that run the company's software to better compete with Apple Inc. and Alphabet Inc.'s Google, which dominate the mobile-phone market. He bought the Nokia handset business in 2014 to give Microsoft the muscle to distribute the software on its own phones.

Mr. Nadella's strategy aims at a market where companies are increasingly procuring phones for employees rather than letting workers bring their own devices onto corporate networks, reversing a trend known as BYOD, for bring your own device. According to Forrester analyst Christian Kane, 32% of information workers world-wide -- workers who use a computing device for work -- carry two mobile phones. Of that group, 27% were issued a device with no choice, and 19% had to choose from a company-approved list of phones.

That niche could provide an opening for Microsoft, International Data Corp. analyst John Delaney said.

"They are basically giving up on the consumer," Mr. Delaney said. "It is the right strategy. It would have been good to have done it a bit sooner."

Mr. Nadella is banking on Windows 10, the latest version of its flagship operating system, to grow that business. Released last summer, Windows 10 is the first version of the operating system that can run on mobile phones and game consoles as well as personal computers. The company is betting that the vast number of devices running Windows 10 -- 300 million by the latest count -- will persuade software developers to create the sort of apps that will bring mobile customers to the company.

While it pursues that Windows-centric strategy, Microsoft is also developing technology for rival mobile operating systems. It offers its Office word-processing and spreadsheet software on Apple's iOS, for example. Mr. Myerson in his email to employees described that approach as "pragmatic."

The layoffs will hit hardest in Finland, Nokia's home, where 1,350 jobs will be cut, Microsoft said. The company said the charges include about $200 million severance payments.

Microsoft plans to close the operations of Microsoft Mobile Oy, the company's Finnish subsidiary that produces mobile devices, according to a person familiar with Microsoft's plans. Microsoft Oy, the Finnish sales and marketing subsidiary with around 270 employees, won't be part of the planned closing, the person said. Microsoft also expects to maintain a limited number of research and development teams in Finland, he said.

Microsoft's mobile phone struggles stretch back more than a decade. It originally offered Windows Mobile, an operating system for mobile phones aimed at business users, in 2003. But BlackBerry Ltd., first, then Apple's iPhone and phones running Google's Android operating system outpaced Microsoft. It shifted strategy in 2010, targeting consumers with the renamed Windows Phone software. Microsoft acquired Nokia's handset business in hope of catching up, which gave the software giant a hardware maker committed to using its operating system. Nokia, once the global leader in mobile phones, withered on Microsoft's watch.

"When I look back on our journey in mobility, we've done hard work and had great ideas, but haven't always had the alignment needed across the company to make an impact," Mr. Myerson wrote in his email to employees.

--Matthias Verbergt contributed to this article.

Write to Jay Greene at Jay.Greene@wsj.com

 

(END) Dow Jones Newswires

May 26, 2016 02:48 ET (06:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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