Ballmer's boondoggle is now Nadella's nightmare

Microsoft's Nokia acquisition was a poorly thought-out idea, and now it's costing Microsoft billions.

Microsoft Nokia layoffs write-off Steve Ballmer Satya Nadella
Reuters/2013 file photo

I've said it before and I'll say it again: if Steve Ballmer truly did throw a temper tantrum with the Microsoft board and threatened to quit as CEO if they did not let him buy Nokia's handset business, as has been reported, the board should have called his bluff for the good of the company.

What was a $7.7 billion dollar mistake has turned into a $7.2 billion write down, and only in Washington, DC, is a $14 billion screw up considered minor. This ill-advised acquisition has now cost Microsoft a fortune, taken a good global handset maker out of the game, and killed any chances Windows Phone may have had.

With the write down and layoffs of 7,800 more employees, it's rather clear that Windows Phone has ceased to be anything effective or competitive. Despite having many technical advantages and really great ideas, Windows Phone has failed to catch any fire and holds a meager 3% market share, according to IDC.

You can point to Microsoft for some mistakes – it was charging handset makers for the OS while Google gives away Android for free, for example – but the problems were spread all around. The market didn't want a third OS, none of the premier handset makers were supporting it, and Microsoft's name is still mud in some consumer quarters.

Make no mistake, I consider it a shame. I really like the OS, but the hardware and third-party app support was severely lacking. With Microsoft's write-down and layoffs, the Nokia line is being reduced to a niche market. It will find some support with people who want across-the-board Windows 10 support, and those who don't want Apple or Android, but I don't see how it can make any major headway now.

In an email to employees announcing the layoffs and change in strategy, Nadella said:

"I am committed to our first-party devices including phones. However, we need to focus our phone efforts in the near term while driving reinvention. We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem that includes our first-party device family."

Which means they are no longer trying to grow Windows Phone, as it sounds. So at this point, why are they even bothering?

Jack Gold, a mobile market analyst, told me he thinks Microsoft should copy its Surface Pro 3 approach, which turned around the failing tablet business.

"It got into [the tablet] business because the ODMs weren't building what the market wanted, so Microsoft did it to lead the way, and now the others are following/competing," he told me via mail. "If Microsoft can build a higher-end, consumer and business-friendly phone that everyone wants to get, then building a phone is fine, and they might get some of the ODMs to build WP devices. But being a general hardware supplier for volume phones is a very low-margin business and makes no sense, especially as it disincentivizes other players to build WP devices."

This looks like a rare stumble for Nadella, but no one is perfect. He should have gone all in or gotten all out. Instead, Microsoft is mostly in with a middling strategy that makes no sense. And it's written off a fortune in value from the Nokia acquisition. The good news is a write-down doesn't mean dollars out of the bank, but it does mean dollars that will never be realized.

Microsoft makes billions per year in Android licensing, 10 times what it makes from Windows Phone. Its Office for Android has been well-received. Maybe it's time to realize it can't be all things to all people and give up on at least the handset business.

And maybe it's time to reconsider the members of Microsoft's board of directors, who greenlit this deal, the $6.2 billion aQuantive disaster, and the $8.5 billion over-payment for Skype. While a great deal, it was also far too costly.

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