Job cuts, write-off tag Microsoft purchase of Nokia as a $7.6B mistake

Microsoft’s purchase of Nokia’s phone unit, the last big move championed by Steve Ballmer, was touted as a way to jump-start the Redmond company’s position in a global smartphone market dominated by Google and Apple.

Less than two years later, Microsoft has acknowledged that the ex-CEO’s move was an expensive mistake. Microsoft on Wednesday said it would write off essentially all of the assets acquired in the deal, $7.6 billion in total, and lay off 7,800 employees.

The layoffs, equivalent to more than 6 percent of Microsoft’s workforce, will primarily come in the phone unit but won’t be limited to that business, Chief Executive Satya Nadella said in an email to employees Wednesday morning. Most of the layoffs, which will be carried out over the next several months, are expected to fall outside the U.S., Microsoft said. A company spokesperson did say some layoffs would occur in the Seattle area but declined to specify how many or which business units would be affected.

Microsoft will take the charge as an on-paper blow to its income during its fiscal fourth quarter, which wrapped up at the end of June. Additional associated restructuring expenses are expected to cost between $750 million and $850 million.

Microsoft announced it would buy Nokia’s handset unit in September 2013, weeks after Ballmer announced he would retire within the year. Though the company was already in the hardware business with its Xbox game console and Surface tablet lineup, the move dramatically expanded the device-building arm of what for decades had been primarily software company.

The foray into phone manufacturing proved to be a quagmire. The deal was completed in April 2014, two months into Nadella’s tenure as CEO. Since then, the company has rebranded its smartphone line with the “Microsoft Lumia” name and released a range of devices that met with limited success. The business continued to lose money.

“There really was no change in strategy,” said Ryan Reith, director of mobile research at IDC. “It starts with [Ballmer]. I think the reality is they had no clue what the hell they were doing when they acquired Nokia.”

Microsoft will continue to build some phones, and encourage other device makers to tailor their phones to the Windows platform but will abandon the strategy of growing a stand-alone phone business, Nadella said in his note. Instead, Microsoft will trim its focus on “unique contributions” for three constituencies: business customers, budget phone buyers and Windows fans.

The moves fit within Nadella’s broader strategy of narrowing Microsoft’s focus toward productivity tools, software to enhance its Windows operating system and building its network of Web-accessed computing power and data storage.

The company last week announced it would transfer its display-advertising business — and a reported 1,200 employees — to AOL.

The exit of that business came a few years after another big write-down. In 2012, Microsoft reported its first ever quarterly loss after taking a $6.2 billion charge to account for the reduced value of aQuantive, a Seattle-based digital advertising company Microsoft had bought in 2007 in a bid to better compete with Google.

Also last month, Microsoft said some mapping technology, and an additional 100 employees, were included in a deal with ride-hailing company Uber.

“This is back to basics for Microsoft,” said Jeff Orr, a mobile analyst with ABI Research. “Reading through Nadella’s memo reminds me very much of earlier days,” he said, when Microsoft was more focused on building software that tied to devices built by others, rather than manufacturing the hardware themselves.

Microsoft’s share of the global smartphone-operating-system market has remained tiny since the Nokia deal. Just 2.7 percent of the smartphones sold worldwide in the first three months of 2015 were powered by Microsoft’s Windows Phone, according to IDC, little changed from a year ago. Microsoft warned in April that the phone unit’s performance had worsened despite steep cuts to head count and other costs.

Nadella a year ago announced layoffs that would affect about 12,500 employees who came to Microsoft from Nokia (along with 5,500 other Microsoft employees). The company shuttered phone factories from China to Hungary.

The size of the cumulative cuts to the 25,000-employee workforce at the time of the acquisition may mean Microsoft plans to contract with other hardware makers to build future phones rather than make them on their own, said Peter Richardson, an analyst with Counterpoint Research. “If the cuts leave Microsoft with roughly 5,000 employees in phone hardware, “that’s not a small number, but they’re not going to be doing any manufacturing with that.”

A Microsoft spokeswoman declined to comment on plans for other remaining manufacturing facilities acquired in the Nokia deal, located in Vietnam, Mexico and Brazil.

Stephen Elop, the ex-Nokia CEO who formerly ran Microsoft’s hardware unit, was among the executives who were to leave the company in an organizational shift announced last month. Microsoft’s hardware businesses, from phone to Xbox and Surface tablet line, were folded into Terry Myerson’s Windows and operating systems group. Jo Harlow, the head of Microsoft’s phone division, is also leaving the company.

The current round of cuts will include 2,300 of the 3,200 Microsoft employees in Finland, the company says. And in a separate email to employees on Wednesday, Chief Operating Officer Kevin Turner signaled that layoffs would also fall on Microsoft’s sales and marketing group.

The Nokia write-down is the culmination of years of declining market share for the former Finnish stalwart, a pioneer of cellphone technology that was the largest mobile phone maker in the world as recently as 2011.

Elop that year famously wrote a memo to employees likening the company’s situation to that of an offshore oil-rig worker who finds himself on a burning platform and can choose to stay or jump into the sea below. Apple and phone builders using Google’s free-to-use operating system were then making rapid inroads in markets formerly dominated by Nokia.

Under Elop, Nokia reduced support of the Symbian operating system, tying the company’s strategy instead to Microsoft’s Windows Phone platform. With Ballmer, he later helped engineer the sale of the Nokia handset business to Microsoft.

“Looking at it from a human point of view, it’s astonishing and sad,” Richardson, who used to lead Nokia’s market-research group, said of the company’s decline. “I spent a lot of my time at Nokia, and it was a great business. How quickly things change.”