Microsoft attempted to use its purchase of Nokia's Devices and Services division to give it a first-row seat in the global smartphone market, pitting it against the likes of the Apple iPhone and smartphones running Google's Android operating system. In addition, by developing both the operating system and hardware in-house, it would give complete control over the user experience, much like Apple and Google do with the iPhone and Pixel respectively.
Hindsight is 20/20, and knowing what we know now, it's easy to see that acquisition was a mistake. In a new book that was published today – Hit Refresh -- current Microsoft CEO Satya Nadella revealed that he was against the deal from the very start. At the time, Nadella was on then-CEO Steve Ballmer's senior executive team.
“The hope was that combining the engineering and design teams at Nokia with software development at Microsoft would accelerate our growth with Windows Phone and strengthen our overall devices ecosystem," said Nadella in his book. "The merger could be the big, dramatic move Windows needed to catch up with iOS and Android in mobile.”
However, Nadella did not agree with this line of reasoning, and stated that the market could neither sustain, nor wanted a third player in the smartphone OS market to challenge Android and iOS. Given that Microsoft had already thrown away whatever goodwill it had with Windows Mobile before the iPhone arrived on the scene, its chances for survival were dismal at best in the current market. "It was too late to regain the ground we had lost. We were chasing our competitors’ taillights," Nadella opined.
For this reason, Nadella voted no on the merger, although we know now that his dissent alone was not enough to stop the transaction from going through. With Nokia under Microsoft's umbrella, Ballmer couldn't stop Windows Phone's bleeding. And even though Nadella vowed to adopt a "mobile first" strategy when he took the helm in 2014, Windows Phone's fortunes never improved.
Microsoft eventually took a $7.6 billion write-down on its smartphone business and cut 18,000 jobs in the process.
Recently, Ballmer expressed his own regrets about how he handled hardware at Microsoft -- both in PC and smartphone form-factors. “I think I was too slow, in cases, to recognize the need for new capability. And particularly in hardware,” said Ballmer in a May interview. “I wish we'd built the capability to be a world-class hardware company, because one of the new expressions of software is essentially the hardware, and I think we came to that later than I think the company should have built that under my leadership should have built that capability earlier than we did."
"We tried to use all the same techniques, and the same techniques were never going to get us there,” added Ballmer in reference to Microsoft's licensing model for Windows Phone devices. “We had the wrong monetization model, we had the wrong delivery model -- all of that, and it's because we didn't build new capability."
So, what does this mean for Microsoft's future in smartphones? Will the company ever get back into making its own smartphone hardware, or will it be relegated to simply providing software and services for Android and iOS devices? "We should only be in the phone business when we have something that is really differentiated,” said Nadella.