Shira Ovide and Chelsey Dulaney, writing for the WSJ:

The departure of Mr. Elop along with one of his closest deputies, Jo Harlow, is the latest sign Microsoft is hitting the reset button on its struggling smartphone hardware business. The more than $9 billion purchase of Nokia’s handset business—a deal struck by Mr. Nadella’s predecessor Steve Ballmer in late 2013—was supposed to make Microsoft a relevant player in smartphones.

What I don’t understand is what changed between when Satya Nadella took over as Microsoft CEO and now? Meaning, what factors did he consider when he *didn’t* make this decision during the past year. I don’t mean that critically, either. Perhaps Satay Nadella, too, wanted to believe Microsoft smartphones might succeed, and decided to wait a year. Unfortunately, we are at a point in the smartphone and tablet market where a decent product, or even a good product, isn’t enough to succeed.

Basically, there are two sets of factors¹ that drive product success:

Product factors: Superior performance, features, ease of use, design, etc. Or superior price.

Business system factors: Having a consumer installed base, a developer base, a brand, distribution channels, and marketing spend.

At this point, Apple and Samsung have scale and high performance in both sets. And no one else comes close. (Notably, Microsoft’s installed base of Windows and Office users, its developers, and its brand don’t matter when it comes to handsets.) Even if you have a good product – say a Moto X or a recent Lumia model – if you don’t have the business system behind it, you won’t succeed. You simply have less access to the market.

I often use an exaggerated example to illustrate this: you could give Samsung any mobile company’s flagship smartphone — Moto X, LG G4 or, in this case, a Microsoft Lumia 830 — and Samsung could push it thru its business system to sell 30M – 50M units. Done. In contrast, those brands struggle to sell a fraction of that many flagships. And if you’re Microsoft, you’re not only trying to sell product, you’re also trying to grow your platform, Windows Mobile.

This has multiple implications but, to keep this post short, let me just introduce one, in the form of a question: If you’re a smaller smartphone maker, and you stumble upon a killer feature (or offer a 3rd platform, like Windows Phone), what do you do? Meaning, you could launch it, get some modest uplift in sales, and then watch your (larger) competitors copy its best elements. And then what? Or you could sit on it. And then what? (Assume licensing is not an option; and it basically wasn’t a viable one for Windows Phone, with Microsoft making hardware.)

You’re almost better off treading water with your product and focusing on building up your business system – your distribution, customer service, marketing, etc. Meaning, keep your powder dry until you have the market reach to benefit from your innovation. …If you can ever reach that point… There’s really no good answer.

Back to licensing (mentioned above): If you *are* making a platform, like Windows Phone, and if you don’t have a good hardware business of your own, then you’re better off increasing the odds that others use it… obviously… For Microsoft, that means 1) Lower the price, to zero and 2) Stop competing with the mobile device makers that you want using your platform. #1 is done. #2 just happened, and it means you don’t need a smartphone hardware business and, hence, a leader for it.

This is one way to frame the situation that Microsoft faced. Add this to the fact that cloud computing is key to Microsoft’s future, and it probably became even harder for Mr. Elop and others to defend the investment that Microsoft would have needed to even have a shot at succeeding with smartphone hardware. Basically, it was too much of a drag or distraction for Microsoft, with a very low odds of success. Let’s see what Microsoft actually does with Windows Phone and Lumia models in the next few months.

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1. As much as I love R&D, I’m not calling it out specifically here because it’s represented by the product factors, and because I want to focus on aspects that directly touch the buying consumer.

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