Why did Microsoft go so wrong on mobile?

If only Microsoft’s timing had been better.

The company best known for its Windows operating systems and Office productivity software stunned observers earlier today when it announced its largest-ever layoffs. The Redmond-based software vendor will eliminate 18,000 positions over the next year, including 12,500 from the Nokia devices division, which Microsoft acquired for US$7.2 billion last September. Its previous-largest layoff was in 2009, when it terminated 5,900 employees amid the global economic meltdown.

Failure to pivot

For well over a generation, the Redmond-based software vendor has dominated the technology space like few before it. It leveraged a brilliantly crafted licensing deal to provide the operating system for IBM’s Personal Computer into an empire that defined PCs almost to the exclusion of all others.

The rise of mobile devices, apps and related services over the past decade, however, caught Microsoft flat-footed. Although it released its first mobile operating system, Windows CE, in 1996, for hardware supplied by Hewlett-Packard and NEC, among others, a full 11 years before Apple’s iPhone was launched, the company has largely failed to gain much more than a foothold in the market for smartphones and tablets. Through their Pocket PC and Windows Mobile incarnations, Microsoft-powered mobile devices looked and worked a lot like badly stripped down desktop computers, and in doing so reflected a company fearful of undercutting its legacy business with a radically different mobile-first offering.

Windows Phone finally ditches the desktop metaphors, and is growing into a product that doesn’t treat mobility as a sideshow. Unfortunately, it all comes a little too late for a market that has already moved on. Windows Phone is a stellar effort, and the Windows Phone 8.1 update scheduled to bow later this year, along with ever-tightening linkages to Microsoft’s growing suite of online services such as Office 365, OneDrive, and Skype, will further refine an already well-received product.

Within that context, the Nokia acquisition was supposed to help Microsoft quickly integrate its Windows software on Nokia’s smartphones and tablets, which would allow it to more tightly control the user experience – in much the same way that Apple sells its devices as cohesive packages of hardware, software and services, all controlled by a single vendor. Simply buying the company, however, doesn’t suddenly allow Microsoft to achieve vertical integration nirvana. These things take time.

Even if that corporate integration happens tomorrow, Windows Phone faces other obstacles. Compared to Apple’s iOS and Google’s Android, Microsoft’s mobile offering isn’t unique enough to prompt a major market shift. Unless Microsoft finds some way to convincingly leapfrog Apple’s and Google’s offerings, it is forever doomed to distant third-place status in a market that realistically only has room for two major players. In the meantime, Microsoft inherited over 25,000 employees when the Nokia deal closed in April, leaving it with a headcount of 127,104 as of last month. With investors expecting synergies in the $600 million range, Nadella couldn’t afford to wait for the integration to take root, and pulled the trigger on today’s layoffs.

A shrinking need

All of this is unsettling news for Microsoft as it grapples with another generational transition in end-user behaviour. Thanks to the mobile boom, we’re spending less time using traditional desktop and laptop PCs. We've evolved from a world where traditional PCs were our sole, do-everything devices to today, where a more diverse device landscape lets us pick and choose the best hardware for the particular job. So we use smartphones and tablets for quick-lookup and messaging activities, and reserve our full-blown computers for the heavy lifting stuff that pays the bills.

None of this means that Windows and Office are dead. Quite the contrary, as these cash cows continue to feed Microsoft’s coffers. Revenue for Windows sales to hardware makers was up 4 per cent in Microsoft’s most recent fiscal quarter, while consumer Office revenue jumped 15 per cent and commercial Office increased by 6 per cent. Likewise, its enterprise and cloud-based businesses are quietly gaining momentum, with the company booking a 7 per cent increase in commercial revenue – to $12.23 billion – last quarter.

But Microsoft’s critical flaw has always been its corporate myopia, its inability to appreciate that cash cows don’t live forever. As long as the quarterly numbers were strong, leadership didn’t have to worry too much about the larger-scale market shifts that weren’t yet fully reflected in the financials. Satya Nadella is showing encouraging signs of recognizing the need for greater agility, but undoing the stay-the-course culture that his predecessor, Steve Ballmer, religiously institutionalized won’t happen overnight.

Investors may be cheering the layoffs – shares spiked over 7 per cent in the leadup to the announcement, and another 3 per cent after Nadella’s posting went live this morning – but that’s little more than a herd-mentality response to a company getting serious about aligning itself to market reality. Shareholders love layoffs, at least for the short-term. Beyond the horizon, though, they expect more than just promises and long-winded emails from Nadella as he transitions the company into uncharted territory.

For companies that hope to remain relevant beyond the lifespan of the marquee products that put them on the map, identifying the existential future threats to their current – and very real – revenue streams has now become key to their survival. Like so many companies before it, Microsoft missed the cues because it believed in its own immortality. Today’s layoffs prove no one is immortal.