Published on the 09/07/2015 | Written by Donovan Jackson

Nokia handsets are dead and Microsoft killed them. Where to for the Surface…

For many, the death knell of Nokia handsets signals the end of an era. Once globally dominant, nearly everyone of a certain age remembers owning at least one of its phones. But as Microsoft pulls the plug, it is instead the end of an error and a perhaps entirely predictable outcome given the vendor’s proven ham-fistedness in the hardware business.

The Nokia mobile handsets acquisition, completed with much fanfare just a year ago, effectively fizzled out with a US$7.6 billion writedown and with 7800 workers likely to receive a pink slip.

The acquisition always had the potential of a poisoned chalice; the Finnish company, once the world’s top handset maker, was rapidly outmanoeuvred by Apple and Samsung (or, perhaps more accurately, iOS and Android) and had haemorrhaged market share as its phones went from flash to obsolete overnight. The infamous Stephen Elop ‘burning platform’ memo heralded the end of its operating system, Symbian, in favour not of proven winner Android, but a proven dog.

By that point in time, Microsoft had produced some truly bad mobile versions of its flagship operating system, in turn polluting the market with practically unusable devices.

Simply put, Windows powered phones have never captured the imagination of users, business or otherwise. Instead, iOS and Android devices (and their enormous ecosystems of developers) have steadily worked to chip away at functionality Microsoft tried to retain for itself. Word documents, Exchange email, Excel spreadsheets – all these and more could be used on devices which were cheaper, faster, easier to use and which consumers actually wanted.

While the immediate question is ‘what becomes of Microsoft handsets’, by now named Lumia (and the answer is somewhat predictable), the next one is this: where to for Microsoft’s ‘other’ major device business – the Surface?

Let’s deal with handsets, first. The Guardian has the answer: ‘[CEO Satya] Nadella states that, “in the near-term, we’ll run a more effective and focused phone portfolio while retaining capability for long-term reinvention in mobility.”

‘What that really means is that Microsoft is largely throwing in the towel on smartphone hardware. In laying off the 7,800 staff it has neutered its ability to operate a multi-device lineup under the Lumia brand’.

It’s an expensive, but not unprecedented misstep by the company. Investors, however, recognise that Microsoft is not a hardware company (and it isn’t difficult to come to that conclusion, given Microsoft’s consistently disastrous form in this area of the technology business), with its shares rising on the news of the demise of the handset business.

New Zealand-based technology commentator Ben Kepes said the development is a positive move for Microsoft. “Nokia was a deal done by the previous Microsoft CEO, Steve Ballmer. The new CEO has a firm grasp of where the company’s future lies – it’s the cloud, Azure and applications, not ‘me-too’ devices. It’s a shame Nadella has been lumbered with Ballmer’s poor decisions, but he’s doing a great job of getting the company out of the mire.”

Where does that leave the Surface? Launched in 2012 and with a perhaps typically confusing (give the many permutations of, for example, of Microsoft’s operating systems) range of options, the Surface has never really gained notable traction. Now in its third generation with a fourth likely to see the light of day before the end of the year, the Surface is technically impressive, more so since discontinuation of the perplexing stripped down ‘RT’ versions, but the market remains indifferent.

Despite sales figures from the last quarter (Q2 2015) which reports revenue growth of 8 percent for the Devices and Consumer group, Microsoft doesn’t split out Surface sales from those of its Xbox games console. However, it did say that Surface revenue was up 24 percent against a year earlier.

If that sounds good, it has to be borne in mind that this is, three years after the launch, still off a low base.

Nadella has proven that he has the mettle to identify and cauterise those parts of Microsoft which are bleeding, an approach rewarded by the market. The share price has rallied on the most recent news, up by some 1.4 percent on the day, but perhaps more telling is that since Nadella took the reins a little under 18 months ago, it has seen a rise of around 22 percent.

Somewhat perversely, perhaps, Nokia Corporation – still a 12 billion Euro per annum business and one of Finland’s largest corporations – announced in June that it may re-enter the smartphone business.

While local Microsoft representatives were approached for comment, they referred iStart to the company’s press release.