Microsoft's CEO defends making Windows Phone free, hints at wearables

In his first quarterly conference call with investors as Microsoft's (NASDAQ: MSFT) new CEO, Satya Nadella promised the company would work to innovate more quickly in an effort to redefine itself as a mobile-first, cloud-first company. Nadella also explained Microsoft's recent decision to eliminate licensing fees for Windows device makers that are building smartphones and tablets with screens smaller than nine inches.

CEO, Satya Nadella microsoft nokia


Essentially, Nadella said that the move to free Windows Phone for hardware licensees is a way to grow the Windows Phone ecosystem more quickly.

"When it comes to new opportunities, from wearables to Internet of Things, we want to be able to participate in all of this with our Windows offering, with our tools around it, and we want to be able to price by category--and that's effectively what we did," Nadella said during the company's quarterly conference call. "We looked at what it made sense for us to do on tablets and phones below nine inches, and we felt that the price there needed to be changed. We have monetization vehicles on the back end for those, and that's how we're going to approach each one of these opportunities. Because in a world of ubiquitous computing, we want Windows to be ubiquitous. That doesn't mean one price, one business model for all of that. And it's actually a market expansion opportunity."

Microsoft earlier this month at its Build developer conference announced it is making Windows Phone, and Windows software for phones and tablets with screens of less than nine inches, free for handset makers to use in their devices. The move represents a radical shift for Microsoft as it seeks to expand market share for devices running its software, especially Windows Phones.

Such a shift brings Microsoft more in line with Google's (NASDAQ:GOOG) business model for Android. Google gives away Android software to OEM and ODM partners, but makes money on advertising across its services and from users who pay to access services like cloud storage and music streaming.

In its quarterly report, Microsoft said that its revenue from Windows Phone increased $429 million or 33 percent during the nine months ended March 31, 2014, compared with the nine months ended March 31, 2013. The company said the increase reflected rising mobile phone patent licensing revenue and higher sales of Windows Phone licenses.

Overall, as the Wall Street Journal pointed out, Microsoft in its most recent quarter reported that its net income declined 6.5 percent to $5.66 billion, and the company's revenue fell 0.4 percent to $20.4 billion. The results were slightly better than analysts had expected, the WSJ noted.

More generally, Nadella explained that Microsoft will work to more carefully refine its offerings and deliver what customers are asking for. "Our industry does not respect tradition, it only respects innovation," he said, adding that Microsoft will deliver "courage in the face of reality."

Interestingly, Nadella also said that "we want to build products that people love to use," and he said that Microsoft will shift to focus on usage statistics for Microsoft devices and services as a way to gauge how its customers are responding to its offerings.

Microsoft on April 25 closed its acquisition of Nokia's (NYSE:NOK) devices business. However, Microsoft CFO Amy Hood explained that Microsoft isn't giving guidance on the Nokia business yet because the company doesn't yet have the information on Nokia's business it needs to provide a clear prediction. "We've not had the type of access until close where we could give the type of guidance that we've come, and you've come, to expect from us," Hood said during Microsoft's quarterly conference call.

Further, Microsoft said the final closing price for Nokia will be "slightly higher" than the $7.5 billion it announced last year. And contrary to the original acquisition plan announced last year, Nokia's manufacturing factories in Masan, South Korea, and Chennai, India, won't be transferred to Microsoft. The Chennai factory's assets are frozen due to a tax dispute with local authorities. The Masan site will be closed.

In announcing the closing of the acquisition, Microsoft promised to continue to support all existing Nokia products--including the company's Android-powered Nokia X line of phones. Microsoft's plan to support Nokia X phones is noteworthy since Microsoft executives were not enthusiastic about the phones when they were announced. "Some things we're excited about, some things we're less excited about," Microsoft's Joe Belfiore, corporate vice president of Microsoft's operating systems group, said earlier this year in response to questions about Nokia X. At the time, he said Microsoft would continue to support Nokia as it worked to close its acquisition of Nokia's hardware business.

For more:
- see this Microsoft release
- see this Bloomberg Businessweek article
- see this WSJ article (sub. req.)

Special Report: Wireless in the first quarter of 2014

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Article updated April 25 with information on Microsoft's closing of its purchase of Nokia's device business.