Microsoft isn’t sweating the death of Windows Phone and here’s why

Microsoft’s holiday quarter results were good, with the obvious exception of Windows Phone. The mobile operating system, which has seemingly been at the bottom of CEO Satya Nadella’s to-do list for a while, shrank by 49% over the three-month period to just 4.5 million shipments.

This number is tiny and it’s hard to sugarcoat that, especially in the face of Apple’s monster iPhone sales.

The Verge declared Windows Phone “dead” and it’s easy to see why. As a whole, the operating system has shipped just 110 million units in its entire lifetime. To put that in perspective, iOS and Android have sold over 4.5 billion units.

It’s easy to see why people think Windows Phone is “dead.”  However, the debate is largely irrelevant.

In many other companies, having a core business — using the term “core” loosely — that is doing so badly would be a big problem and one that management would have to address immediately.

However, this company is Microsoft — a company that operates multiple billion-dollar businesses in a diverse range of fields — and so, really, the failure of Windows Phone does not affect the broader picture.

From a public perspective, the failure of Windows Phone does matter. Microsoft launched a dud product that very publicly failed, and has severely hampered any chance of winning the mobile race. But, looking at Microsoft’s earnings, it’s easy to see why the company — or, more broadly, its shareholders — aren’t bothered.

Microsoft Corp shareholders drink coffee as they wait to hear Chief Executive Satya Nadella speak at his first annual shareholders' meeting in Bellevue, Washington December 3, 2014. Nadella has added $90 billion to Microsoft's market value since taking the helm in early February. REUTERS/Jason Redmond (UNITED STATES - Tags: BUSINESS SCIENCE TECHNOLOGY) - RTR4GLJ5

When asked by BuzzFeed about Windows Phone, Nadella shrugged it off. “If you think of this more like a graph, these [devices] are all nodes,” he said. “Sometimes the user will use all of these devices … sometimes they’ll use only one or two of our devices and some other platforms — so be it.”

Looking through Microsoft’s earnings, it’s clear to see that Windows Phone is a blemish on an otherwise good scorecard. The Wall Street Journal, for example, described Microsoft’s “vitality” in its businesses, especially the cloud.

It’s easy to forget, but Nadella ran Microsoft’s cloud business before becoming CEO and, as such, it is run very well. Indeed, one of the key takeaways for Wall Street was just how well it is doing.

As an analyst note from Barclays noted, Microsoft has increased the amount of “attached commercial cloud services” that clients are using. Essentially, this means that customers are adding more Microsoft services — mainly Office 365 — than ever before.

In the conference call after the results, Nadella noted that the number of companies who added services increased by 15% over last year, showing that businesses actively want more services.

A survey by Gartner, a well-renowned research firm, found that Microsoft dominates cloud services for big businesses. According to Gartner, a big business is one with revenues of over $10 billion per year or 100,000 employees. (Apple, the world’s biggest business by value, has around 100,000 employees.)

The lead over Google, which has its Apps for Work suite, is vast and only decreases slightly for smaller businesses. All of these clients will purchase tens of thousands of Office 365 subscriptions, or Azure subscriptions, or Windows licenses.

It’s easy to see why, when its cloud revenues increased 5% year-over-year, Microsoft isn’t sweating the decline of Windows Phone.

Microsoft CEO Satya Nadella holds a Nokia Lumia mobile phone featuring Windows 8.1 operating system during his keynote address at the company's "build" conference in San Francisco, California April 2, 2014. REUTERS/Robert Galbraith (UNITED STATES - Tags: BUSINESS SCIENCE TECHNOLOGY) - RTR3JOP3

The only strangeness of this is: Why does Microsoft persist with Windows Phone?

According to reports, the company is rumoured to be working on a Surface Phone which could just be a rebranded Lumia. This theory is backed up by separate reports that the “last Lumia” is coming — probably the Lumia 650 — and from there on out Microsoft will just produce Surface handsets.

This idea makes sense, in theory, because the Surface line of laptops and tablets are growing every quarter. In the three months leading up to January, revenues reached $1.4 billion, up by 21% in constant currency (which does not adjust for macro economic conditions), as big businesses buy in.

Nadella noted on the investor call after the results that Surface growth within businesses was something Microsoft was seeing and my own talks with businesses who use Microsoft products show interest in the laptop/tablet hybrids, especially as the Surface runs Windows.

From this perspective, making a Surface Phone, in whatever form it takes, would make sense. Windows, even on mobile, is still something that businesses need and having a phone that runs Office and any other Windows-only apps is something all CTOs would love.

Shifting its mobile phones to enterprise only would, for Microsoft, will be a good idea. However, it would risk turning the company into Oracle, with no consumer-side technology beyond Xbox which, by and large, is not associated with the Microsoft brand.

Windows is still consumer-facing to an extent, but as more and more people buy smartphones over PCs, that is slowly changing.

Switching to a heavier focus on enterprise wouldn’t be a bad thing at all: All of Microsoft’s businesses that have an enterprise component — cloud services, its productivity businesses, and Windows — are up year-over-year, and that’s a trend that is set to continue.

Lumia 550

So what should become of Windows Phone?

The most likely answer is that Microsoft will just leave it be. The team working on it within Microsoft will continue to plug away, a job that is made easier by Universal Windows Apps, and the market share will continue to decline anywhere outside of businesses.

Microsoft has been making a larger focus on iOS and Android, which is working well. According to the earnings report, over 300 million people have downloaded Office onto an iPhone, iPad, or Android devices. (To put that in perspective, Twitter has around 300 million users.)

Unlike Apple, which sweats its iPhone business, Microsoft is well placed to shrug of this failure, continue to build-out its other businesses, and book record quarters that beat both Wall Street and Microsoft’s own guidance.

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