Image source: Microsoft.
Windows Phone is all but dead. Gartner's latest market estimates show that Windows Phones accounted for just 0.7% of smartphone sales in the first quarter.
Now, the product Microsoft (MSFT +1.01%) spent $7.2 billion to save looks like it will be done for good. The Windows maker bought Nokia's phone business about two years ago in order to improve its chances of making a dent in the all-important smartphone market.
Long story short: That didn't happen.
Microsoft is now planning to focus its phone business extensively on enterprises.
So, how much did Microsoft's Nokia purchase cost investors?
Why did Microsoft buy the phone business in the first place?
Microsoft's decision to purchase Nokia's phone business was really a move of desperation. Nokia had previously agreed to exclusively use Windows Phone on its smartphones, but it was reportedly planning to release an Android device. (It eventually released the Android-powered Nokia X about two months before Microsoft closed its acquisition.)
Microsoft wasn't ready to give up on Windows Phone even though Nokia was. It agreed to buy out Nokia's struggling device business for $7.2 billion. Microsoft figured owning the hardware and software of its smartphones would allow it to emulate the most successful company in the industry -- Apple. Unfortunately, Microsoft was unable to execute on that vision.
Microsoft's share of the smartphone market has actually shrunk over time. When it bought out Nokia in April of 2014, Windows Phone had a 3% share of the phone market. That number has consistently declined every year, and last quarter, Windows was installed on just 0.7% smartphones sold in the first quarter.
Big writedowns
Microsoft's failure to execute on its vision of competing with Apple by integrating the hardware and software of its smartphones led to a massive writedown at the end of fiscal 2015. Overall, the company wrote off $7.6 billion from the Nokia acquisition, leading to a $2.1 billion net loss.
Microsoft determined that the goodwill on its balance sheet was impaired. Phone sales in the second half of fiscal 2015 failed to meet expectations, and its sales mix had lower gross margins than anticipated. Microsoft didn't see the issues resolving themselves and determined its goodwill was overvalued.
It wrote down $5.3 billion in phone hardware goodwill -- 98% -- and another $2.2 billion in phone hardware intangible assets, according to its 10-K filed with the SEC. It also faced $2.1 billion in restructuring charges, including severance packages related to 7,800 layoffs.
This year, Microsoft is writing off another $950 million. It will also face restructuring charges again after letting go of another 1,850 employees.
Microsoft was able to sell its feature phone business for $350 million recently, so it was at least able to salvage that much from the pile of impaired goodwill and intangible assets burning its balance sheet.
Overall, the Nokia investment looks like a complete bust. Microsoft investors lost the original $7.2 billion plus the severance fees the company paid from terminating all those contracts. Microsoft also paid for continued research and development of its phone hardware. In return, it received $350 million for the phone business and some hefty tax write-offs.
But management says it's not done yet
"We're scaling back, but we're not out!" Terry Myerson, Microsoft's VP of Windows and Devices, said in an internal email. Microsoft is instead focusing on the enterprise space, where it has inroads with its Office software. It's betting the combination of security, manageability, and cross-device capabilities will make it appealing to businesses.
That's still no sure thing. Blackberry may think that tone sounds familiar, since CEO John Chen took the same approach after Blackberry was decimated by Apple in the consumer handset market. The company has yet to turn things around in hardware sales.
Microsoft is now serving a very niche market with its mobile device hardware. If it can leverage that into software and cloud service sales, then it might be worth it, but the results won't show up in its phone business. With its assets now written down to practically nothing, investors don't have too much left to lose from Microsoft's continued experimentation with smartphone hardware.
