Microsoft’s Nadella faces handset dilemma

Microsoft’s new chief executive officer is about to face his first big dilemma. Should he set his new mobile handset division demanding profit goals if it is to remain part of the world’s biggest software company?

Or should he give it some leeway, treating it instead as part of a broader strategic imperative as Microsoft tries to claw back lost ground against Apple and Google in the all-important mobile computing market?

The completion on Friday of Microsoft’s €5.44bn purchase of the Nokia handset business presents Satya Nadella with the kind of business headache new bosses dread.

Former CEO Steve Ballmer announced the deal eight months ago to a collective groan on Wall Street, where it was seen as a severely margin-diluting move that had little bearing on the company’s core business of supplying software and services to business customers.

It may be that he felt Microsoft had no alternative. As the producer of around 90 per cent of the handsets carrying Windows Phone software, Nokia was too important to Microsoft to risk losing: had it followed other handset makers into the Android camp, it might have dealt a fatal blow to Microsoft’s hopes of becoming a force in smartphones, the dominant computing platform of the day.

But Nokia has struggled to make headway and now it is up to Mr Nadella, Mr Ballmer’s successor, to make the deal work – which means either forcing the handset business to prove it can pay its way, or convincing investors to view smartphones as an essential part of a broader strategic bet.

“The big danger for Microsoft is that it gets caught in two minds between these two options,” says Geoff Blaber, an analyst at CCS Insight.

There is no question which way Wall Street wants Mr Nadella to jump.

The departure of Mr Ballmer has stirred up hopes among investors that the Nokia deal will be rethought. Microsoft’s board went along with it reluctantly at the insistence of the former CEO, according to close observers: under new leadership, things may now look different.

Mr Nadella’s stance has added to the hopes for a rethink. Whereas his predecessor talked of a new strategy for Microsoft based on “devices and services”, the new Microsoft boss pointedly stressed only services in his first public comments as CEO last month. He has also subtly shifted the company’s strategic focus towards “mobile and cloud” – a formulation that keeps the emphasis on mobile computing without requiring Microsoft to be in the hardware business