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Last updated: July 17, 2014 3:00 pm
Microsoft is slashing its Nokia handset business in half, cutting 12,000 jobs at the division, as new chief executive Satya Nadella unveiled his first response to the company’s crumbling position in the mobile computing world.
The job cuts are part of 18,000 across the US software company, amounting to 14 per cent of its total workforce and the deepest in its 39-year history.
The drastic cuts pointed to a narrowing of Microsoft’s smartphone ambitions after years of steep losses, reducing its emphasis on the most expensive and profitable part of the market dominated by Apple, as well as the “feature phones” that have long made Nokia’s brand synonymous with mobile communications in many parts of the world.
The news was met with a grim reaction in Finland, where successive rounds of lay-offs at Nokia had already dented national pride.
“It can be said that we have been betrayed,” said Antti Rinne, finance minister in the coalition government and leader of the Social Democrats. “When the deal was made, Microsoft gave the impression it was committed to Finland and Finnish knowhow. Now it seems it’s not going to be that way.”
Mr Nadella, who took the helm in February, sought to paint the cuts as part of a refocusing of Microsoft’s mobile business as it tries to recover years of lost ground. “The first step to building the right organisation for our ambitions is to realign our workforce,” he wrote to company employees.
The new Microsoft boss believes that the company’s best chance of becoming more than an also-ran in smartphones lies in selling a new range of low-priced handsets in the developing world, according to analysts. “It’s a lockout in high-end devices for Apple and Samsung,” said Ben Wood, an analyst at CCS Insight.
The announcement that Nokia’s feature phone business will be merged with the smartphone division is also a signal that Microsoft is pulling back in the most basic handset market as it focuses on devices running its Windows software, he added.
As part of the plan, Microsoft said it would also scrap the low-priced smartphones that Nokia had launched this year using Google’s rival Android software platform, instead shifting these over to its Windows operating system.
Mr Nadella added that he also intended to change the company’s structure by “flattening organisations” and reducing layers of management. The company said it expects pre-tax charges over the next year of between $1.1bn and $1.6bn in severance payments and other related costs.
Wall Street welcomed the expected moves, which follow Microsoft promises to cut $600m a year from costs after the Nokia acquisition, and the company’s shares rose 1.02 per cent to close at $44.53.
However, analysts questioned whether Mr Nadella had a clear strategy in the mobile market. With its share of the sector likely to remain under 5 per cent, it was unclear “how Microsoft stays relevant”, Walter Pritchard, a software analyst at Citibank, said.
Mr Nadella’s first attempt to lay out his vision for Microsoft, in a 3,100-word memo last week, was criticised in some quarters for being opaque and filled with management speak. But it indicated that Mr Nadella wanted to change the company’s strategy to focus more on cloud services and its enterprise businesses.
The 5,500 job cuts in Microsoft’s core businesses amount to about 6 per cent of the total, a steeper cut than the 5 per cent round of lay-offs in 2009. That was Microsoft’s only previous company-wide job reduction and was seen as an important psychological turning point for the company, ending its apparent invulnerability during a long period of dominance of the software industry.
Since then, it has seen Apple and Google rise to lead the new smartphone and tablet businesses, with PC sales contracting and its own smartphone software marginalised.
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