Where can Microsoft's Windows Phone go from here?

With its biggest hardware gamble a failure and Windows 10 about to arrive, the software maker is pressed to prove what it can achieve in the phone business.

Nick Statt Former Staff Reporter / News
Nick Statt was a staff reporter for CNET News covering Microsoft, gaming, and technology you sometimes wear. He previously wrote for ReadWrite, was a news associate at the social-news app Flipboard, and his work has appeared in Popular Science and Newsweek. When not complaining about Bay Area bagel quality, he can be found spending a questionable amount of time contemplating his relationship with video games.
Nick Statt
5 min read

The Lumia 640 XL is one of many budget phones that Microsoft says it is still committed to offering. Dave Cheng/CNET

Taking a look at Microsoft's mobile device strategy, it's a wonder the company hasn't just given up.

The Redmond, Washington-based tech giant was a pioneer of the smartphone industry, creating software that powered phones years before Apple's iOS or Google's Android. Microsoft has recast its plans numerous times, including with the release of Windows Phone in 2010, a highly regarded software that powered phones few people actually bought.

Then, in early 2014, the company bought the handset business of Nokia, its largest partner and at one time the largest phone maker in the world. If Microsoft couldn't get users to flock to Windows Phone on their own, the company hoped buying its biggest device partner might do the trick and help establish its place in the pantheon of phone makers. But in the end, it seems Microsoft has plowed billions of dollars into a business that just hasn't succeeded.

The list of failures is long: Microsoft's software is used by less than 3 percent of smartphone owners. The world's largest app developers continue to focus their efforts on iPhones and Android devices. Microsoft's Nokia assets have been written off to the tune of $8.4 billion, driving Microsoft's largest quarterly loss in its history last Tuesday. The company has also laid off a majority of the 25,000 employees that came from Nokia.

So why isn't Microsoft throwing in the towel? Even industry experts don't know.

"They've fallen flat on their faces with this thing," said Roger Kay, an analyst at Endpoint Technologies Associates. "If they make more mistakes and do it badly, there's no reason to believe they could recover from here."

A Microsoft spokesperson was not available for comment over the weekend.

Plugging away

Microsoft CEO Satya Nadella says the company has not given up on the phone business.

"I am committed to our first-party devices, including phones," Nadella said in a statement earlier this month. The company has plans to continue making low-cost handsets, phones for business users and so-called flagship devices -- gadgets that can go head to head with Apple's iPhone or Samsung's Galaxy phones -- under its Lumia line, the well-known brand name that Microsoft picked up from Nokia.

What Nadella really meant, though, is that the phone business is a critical part of Windows 10, its upcoming software for PCs, tablets, video game consoles and, yes, smartphones. Microsoft will release Windows 10 on July 29 and later this year will roll out mobile overhaul of Windows Phone, officially called Windows 10 Mobile.

"We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem that includes our first-party device family," he said. In that sense, phones for Microsoft are less a tool for competing against phone makers and more a necessary appendage, even if it keeps costing the company money.

Microsoft's acquisition of Nokia's handset business gave the software maker a popular brand to help it gain a foothold in mobile, but those efforts have fallen flat. CNET

That's because Windows 10 -- scheduled for launch on Wednesday -- will be the star across all Microsoft businesses from PCs to Xbox One to, yes, mobile devices. The company has put a lot of effort into making Windows 10 attractive for users and software developers. One of its key features is that it looks similar, no matter what device you use. For software developers, it's easy to write an app once, and it will work on anything that runs Windows with just a few tweaks.

This approach is practical, said Gartner analyst Steve Kleynhans, and allows Microsoft to focus on the "areas where it is successful, and where it does have a footprint."

Apps won't simply look the same. Microsoft wants customers to feel like apps are capable of running on any device. That means if you plug your smartphone into a PC monitor, for example, it could be used as a desktop computer -- with apps that recognize the larger screen. The feature, called Continuum, is one of the few key areas that sets Windows 10 Mobile apart from competitors' offerings.

"If I really could have a phone that talks and becomes a full-blown PC with all the capabilities, that has an appeal to a certain class of users," Kleynhans said. This scenario offers a glimpse into how Microsoft could position its phone platform: as the powerhouse piece of software for handling tasks that competitors' products just cannot.

"Maybe there's something they can do with a phone to appeal to a certain type of user, rather than heading out into the broad market and getting crushed," Kleynhans said. "If they're going to see any success, they have to come up with similar unique capabilities."

Rethinking the approach

If phones are a sinking ship, Microsoft does have a few lifeboats.

Under Nadella, Microsoft has begun relying on alternative strategies to gain a foothold in mobile. Since introducing Office for iPad in February 2014, Microsoft has moved away from selling software with a price tag, to a point -- and is now initially giving its products away for free.

Microsoft offers Word, PowerPoint and Excel free for devices running Apple's iOS and Google's Android software. There's a method to Microsoft's madness.

If you're already using Word on your iPhone, the thinking goes, you're more likely to pay for Office 365, the company's subscription service that offers access to the desktop versions of the full Office suite. In effect, the approach is an extension of the "freemium" model, where software makers offer users a taste of what their products can do, in the hope that consumers will pay for more features later.

"Windows and Windows devices are an on-ramp to those Microsoft services," said Kleynhans. "But it's not the only way to get there. They'll make it available on the other platforms as well -- a Web browser, iOS, Android, even a Mac."

Microsoft last week said consumers last quarter signed up for 3 million new Office 365 subscriptions -- for a total of 15.2 million.

Should I stay or should I go?

But the question remains: Why would Microsoft stay in the phone business after such a costly blunder?

"What was the definition of insanity?" Kay asked. As the saying goes: It's doing the same thing over and over and expecting different results. Yet Kay said this is what Microsoft's phone group is doing: "Why keep beating a dead horse?"

One reason might be the fact that the hardware business isn't dead yet. Microsoft sold 8.4 million Lumia phones in its last quarter, and tens of millions of non-Lumia phones in the low-end device market. That means there are a not insignificant number of Windows Phone users out there who expect some kind of support from Microsoft.

The company has tried to keep up appearances by continuing to shine the spotlight on its mobile efforts at high-profile tech conferences like its Build developers confab. At the most recent Build in April, Microsoft promised developers the opportunity to move iOS and Android apps over to Windows Phone with easy-to-use software.

The hope is that the next wave of must-have apps that follow in the footsteps of messaging service Snapchat, which is still not available on Windows Phone, and ride-hailing software maker Uber don't skip over Microsoft's platform when they hit the scene.

That kind of inertia is exactly what has kept Microsoft in the phone market, despite a long string of failures. If there's just one or two valid reasons to stay at it, said Kay, then that's enough for Microsoft executives.

"If you don't have a phone, you're behind the times," he said. "All the growth is in the phone."