NOKIA AND MICROSOFT

News from Microsoft -1.28% in the last few days 4Q14 earnings, an
announcement of 18,000 layoffs, and the release of a memo from Microsofts EVP
of devices Stephen Elop about rightsizing has brought about a clearer picture of
Microsofts plans for Nokia Nokias phones, which it acquired in April for $7
billion.
Nokia was one of many cellphone manufacturers that struggled as Apple
-1.13%s iOS and Google GOOGL -1.92%s Android gained dominance of the
smartphone market and displaced cellphones and other smartphones. Rumors of
Microsofts buyout interest, or lack thereof, in Nokia circulated for years before
an alliance shifted to an acquisition. But when Microsoft announced the
acquisition last year, the natural question was how the software company
planned to generate profits from a cellphone maker that was bleeding money.
Nokias still bleeding money, and cost Microsoft 8 cents from its earnings per
share last quarter. But strength from Microsofts cloud computing and the sense
that CEO Satya Nadella, who replaced Steve Ballmer in February, is containing
Nokias losses has impressed analysts. Microsoft expects Nokia to break even by
2016, said Amy Hood, CFO of Microsoft, during the earnings call on Tuesday.
Daniel Ives, managing direct at FBR Capital Markets, said after a decade of
missed opportunities, Nadella seems like hes taking an honest look at Microsoft
and skating with the puck in front of him. Hes playing a long game, said Ed
Maguire, senior analyst at CLSA, leveraging the cloud and Nokia as a way to sell
applications.
Despite being obtuse to the suffering of 12,500 former Nokia employees set to
lose their jobs while he praised his business unit, Elop laid out a framework for
cost cuts in a memo to employees on July 17. Devices would focus on high and
low cost Windows smartphones, suggesting a phasing out of feature phones and
Android smartphones. Two business units, smart devices and mobile phones,
would become one, thereby cutting overlap and overhead. Microsoft would
reduce engineering in Beijing and San Diego and unwind engineering in Oulu,
Finland. It would exit manufacturing in Komarom, Hungary; shift to lower cost
areas like Manaus, Brazil and Reynosa, Mexico; and reduce manufacturing in
Beijing and Dongguan, China.
According to reports that same day, Microsoft would sunset Nokia X Android
phones, Asha and Series 40 phones within 18 months.
Nadella gave hints about how Microsoft will make money on Nokia during
Tuesdays conference call. Devices, he said, go beyond hardware and are about
productivity. I can take my Office Lens App, use the camera on the phone, take
a picture of anything, and have it automatically OCR recognized and into
OneNote in searchable fashion. There is a lot we can do with phones by broadly
thinking about productivity.
In other words, the sale of a smartphone is a means to other sales.
Over time, Microsoft may move away from all phones but premium smartphones,
said Maguire. It may shutter or divest more manufacturing assets.

The next generation of Windows, Windows 9, promises to unify phones, tablets,

PCs and gaming consoles with one operating system, noted Kirk Materne,
managing director at Evercore, and the unification may lead to efficiencies and
new opportunities throughout Microsoft.