As it lays off workers, Microsoft also kills its low-end Nokia X smartphones

Analyst predicts Microsoft will sell its entire phone business within 18 months

As Microsoft announced its largest job cuts ever today, it also signaled a retreat from its low-end Nokia X line of Android phones.

Microsoft said 18,000 jobs will go in the next year; that represents about 14% of the company's 127,000-member work force. A total of 12,500 of the layoffs will come from factory and professional jobs that were part of the Nokia acquisition in April. That acquisition added about 25,000 jobs at Microsoft.

A major impact will be felt in Microsoft's still-fledgling smartphone business, which is mainly powered by Windows Phone. After four years of sales, Windows Phone has garnered less than 4% of the global smartphone market.

Following the company's layoff announcement, analyst Jack Gold, of J. Gold Associates, predicted that Microsoft's phone business will be sold or spun off within 18 months. That follows the pattern Google pursued with the purchase of Motorola's phone business, which it quickly sold to Lenovo.

As a result of the cutbacks, Android phones in the low-end Nokia X line will be killed. Nokia had introduced the line before the handset business was sold in April to Microsoft.

"We plan to shift select Nokia X product designs to become Lumia products running Windows," CEO Satya Nadella said in a letter to workers.

In a separate letter to employees, Stephen Elop, vice president of devices and services and former Nokia CEO, said the shift of Nokia X to Windows Phone will occur immediately, while sales of existing Nokia X products continue.

"We will be particularly focused on making the market for Windows Phone," Elop said, noting that Microsoft would target sales of affordable smartphones within the Lumia line to gain traction in that fast-growing market segment.

But Elop also left room for "great breakthrough products" to win sales in the higher end of the market. Microsoft's separate smart devices and mobile phones business units will be combined into one phone business, he added.

Most of Microsoft's phone production will occur in Hanoi, with some continuing in Beijing and Dongguan, China, Elop said. There will be a phased exit of phone production from Komaron, Hungary, he said.

Phone engineering will be concentrated in Finland as it was under Nokia. High-end Lumia products will be developed in Salo, Finland, affordable products, in Tampere, Finland.

Elop also said the devices team will continue to design and build tablets, resulting in "limited change" to the Surface tablet team and those building Xbox devices.

Despite the new focus on phones at Microsoft, Gold said Microsoft faces big challenges. Even if Microsoft were to grow its share of the smartphone market to 5% globally, that would represent nearly 50% growth from its current share of about 3% to 3.5% -- a daunting task, Gold said.

Refocusing Nokia phones away from the X brand is a "sound strategy...but is unlikely to be very successful in greatly increasing market share," Gold said. He called it a "first step down the path of making the phone business saleable," which could happen within 18 months.

Carolina Milanesi, chief of research at Kantar WorldPanel, said Microsoft's new strategy with phones and devices appears to be "go cheaper, to go wider" which she explained means having more lower-end products and getting into more wireless carrier product portfolios.

While Microsoft has been rumored to be designing a smartwatch to compete with Google and perhaps Apple, Milanesi said a smartwatch is not a top priority now. "Future products like a smartwatch depend on how they all fit into Nadella's strategy, but considering their focus is on productivity and platform and services, it would seem to me that something like a smartwatch would not be a key priority."

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen or subscribe to Matt's RSS feed. His email address is mhamblen@computerworld.com.

See more by Matt Hamblen on Computerworld.com.

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