Microsoft's Lumia may be a dead phone walking, as sales continue to fall

As Lumia sales keep sliding, the sole hope is the rumored Surface phone.

The Lumia 950

The Lumia 950 at Microsoft's launch event in New York Oct. 6, 2015.

Credit: Marc Ferranti

Microsoft said Thursday that it sold half as many Lumia smartphones as it did a year ago, and that the trend will continue—what some might call a virtual death sentence for Microsoft’s Lumia smartphone line.

In its quarterly earnings call Thursday, Microsoft said that it sold 4.5 million Lumia phones during the fourth calendar quarter, down a whopping 57 percent compared to  the 10.5 million sold during the same period a year ago. Phone revenue as a whole declined 53 percent, or $1.2 billion. Even worse, Microsoft chief financial officer Amy Hood told analysts to expect that its phone revenue would decline a comparable amount in the coming quarter as well.

That means that by the end of March, Microsoft’s phone business will be worth roughly $636 million in terms of revenue. That’s roughly three times the revenue recorded by Blackberry’s hardware division in November—and BlackBerry, of course, has basically transitioned into an Android phone company. Like the Black Knight, Microsoft’s phone business may not be quite dead yet, but how long does it have to go?

Why this matters: Oddly enough, perhaps the easiest pill to swallow is the one that might normally cost an executive his or her head: the recognition that Microsoft spent $7.2 billion in 2013 to buy Nokia’s device business, and has essentially blown it. But with $102 billion in cash and short-term investments, even $7 billion is a relative drop in the bucket. What has to sting, however, is watching Apple record $18.4 billion in profit alone, primarily by selling iPhones and related services. Microsoft is watching its own  opportunity to develop a smartphone ecosystem slowly evaporate, quarter by quarter.

”Congratulations on a great quarter”

Overall, Microsoft’s profits declined by 15 percent to $23.8 billion, as profits fell 5 percent to just under $5 billion. (Factoring out currency fluctuations and older one-time charges, Microsoft’s revenue grew 3 percent, and profits by 20 percent.) The drop in phone revenue dragged down Microsoft’s overall devices revenue by 26 percent compared with the previous year, despite an all-time high for the Surface tablet business, which recorded $1.35 billion in revenue after the launch of the Surface Pro 4 and Surface Book.

Interestingly, not a single Wall Street analyst asked about the future of Microsoft’s phone business, generally choosing to ask about the state of the overall customer economy or Microsoft’s continued strength in the cloud or enterprise services. Neither did Hood or chief executive Satya Nadella, besides reporting on the performance of the business unit and its future prospects. In fact, practically every analyst congratulated Microsoft for a strong quarter despite the more sobering aspects. 

The Windows Phone space seems eerily quiet. Microsoft isn't booking appointments to show off new devices at Mobile World Congress in Barcelona next month. The rumor pipeline is also cold, beyond tantalizing whispers of a “Surface phone” that some hope could be the savior of Microsoft’s smartphone business. According to AdDuplex, the most popular Windows Phone remains the Lumia 520, released in April 2013. 

Analysts, too, are holding out hope that the Surface phone materializes. "The phone business appears to be trailing off very quickly," Patrick Moorhead, principal at Moor Insights & Strategy, said in an email. "I do not think this is a last gasp however, as I do have a degree of confidence in the Surface team to create a differentiated smartphone if they are given as many chances as they had with Surface Pro. I also believe that there is a future in the commercial market for a Windows 10 phone with Continuum."

To be fair, Microsoft has never officially said it plans to discontinue its smartphone business. But Microsoft’s woes in the smartphone space are well known: a shortage of third-party apps, plus a Windows 10 Mobile operating system seemingly designed for the small, loyal cadre of existing Windows enthusiasts. As Moorhead notes, however, we have yet to see the impact of the Microsoft "bridge" technology, porting apps written for iOS to the Windows platform.

I’ve always been a fan of the Lumia hardware, especially the new Continuum feature, but many of the features that have sold Lumia phones in the past now appear on Android phones and iPhones—in part, where the apps are concerned, because Microsoft put them there.

Microsoft continues to sell Windows Phone overseas, nearing 10-percent penetration in the United Kingdom and other European countries. But in the United States, comScore puts it at 2.8 percent, and falling—and that’s for November. 

Reputation can buoy or bury a product, and once a brand attracts the stink of failure, that’s it. Microsoft hasn’t killed the Lumia line. Neither has the press, or retailers. It’s the customers that have walked away from Windows Phone, leaving it by the side of the road.

Updated at 7:52 PM with comments from Patrick Moorhead.

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