Why Microsoft can’t ditch phones…just yet

Microsoft announced Wednesday that it was shedding thousands of jobs and taking a massive write-down on its Nokia devices business, but analysts say the tech giant has very little choice but to stay firmly committed to the smartphone market.

The U.S. company giant said Wednesday it was slashing 7,800 positions and take a $7.6 billion write-down on its struggling handset business – the division it bought from Nokia for $7.2 billion in 2012.

"We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem including our first- party device family," CEO Satya Nadella wrote in an email to employees.

This apparent mixed message highlights one key point: Microsoft has no choice but to stay in the smartphone game for now, analysts say, given the upcoming release of its hotly anticipated Windows 10 operating system.

'Extremely important'

The "ecosystem" Nadella is referring to is Windows 10, the operating system being released this month that Microsoft has pinned a lot of its future success on. The U.S. company hopes that this will be an OS widely used across a number of devices including PCs, laptops, tablets and smartphones and this is why it needs to stay in the handset business, analysts said.

"It is still extremely important Microsoft makes some mobile devices to show what is possible with Window's 10," Ben Wood, chief of research at CCS Insight, told CNBC by phone.

People near Microsoft pavilion at Mobile World Congress
Simon Dawson | Bloomberg | Getty Images

Microsoft has taken a similar path with its Surface tablet. It created the tablet that doubles up as a PC and put the Windows OS on it in order to show what could be achieved with its OS on a smaller device. Other device manufacturers such as Lenovo have made devices with a similar design and used the Windows OS, for which Microsoft is paid a licensing fee.

Analysts said that Microsoft will need to replicate this model in smartphones and make a "benchmark" device that other manufacturers will be able to make and put Windows 10 on. In this way, the Redmond, WA-based firm can push Windows 10 to a bigger audience than it could with manufacturing its own devices.

"Microsoft is coming out with Windows 10 and their strategy is mobile first and cloud first. I don't think it would make much sense for them to ditch phones right now," Roberta Cozza, mobile analyst at Gartner, told CNBC.


Will Microsoft exit phone market?
Will Microsoft exit phone market?   

"It makes sense for them to take another look at phones, limit the portfolio and take a more focused approach."

Device exit next year?

Microsoft has attempted to make its smartphones more attractive. As part of Windows 10, it has tools that allow developers to create an app for the PC but easily make it compatible with a smartphone. The aim is to attract more developers to make apps for Windows mobile, something it has seriously struggled with in the past.

The lack of appeal for its devices and the fact that it hasn't released a major flagship smartphone in over a year has made it a weak player in the global market. During this time, Apple has strengthened its position at the premium end of the market while Samsung regained its position as the world's biggest smartphone player, according to IDC. Microsoft has just a 3 percent market share.

Cozza said Microsoft could look to be a player in the enterprise space like BlackBerry, but this is "niche". Even if it can't exit the device business right now, analysts haven't ruled it out in "one or two years" as struggles are likely to continue.

"Ditching it altogether, not yet, but it might become inevitable," Cozza said.