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What do Microsoft's latest mobile layoffs mean for the Surface phone?

If we needed any more confirmation that Microsoft's Nokia acquisition was a disaster, it came today in the form of another 1,850 layoffs, mostly from legacy operations in Finland. That's in addition to the nearly 8,000 heads that rolled last year in the wake of the Nokia write-off.

After the layoffs last year, CEO Satya Nadella said Microsoft was "committed to … first-party devices including phones," but also effectively admitted iOS and Android had won the mobile war, a war Microsoft couldn't afford to wage any longer — at least directly. As a result, I declared Windows Phone (and by extension Windows 10 Mobile) all but dead.

I stand by that assessment, although the picture today is slightly different. Microsoft now has fully released its Windows 10 platform — desktop, tablet and mobile (and even HoloLens). There are now Windows phones, running Windows 10, in the market, and those phones are capable of doing some unique things, most obviously Continuum, which leverages Windows Universal Apps to run desktop apps from a phone. 

At the same time, the market share of Windows phones is in free-fall. Whereas at the end of 2013 things were looking decent for the platform — market share was small but growing, and even second place in some markets — today Microsoft's presence in mobile is basically a rounding error. It may not technically be dead, but it's effectively walking dead — a zombie platform.

That's bad news for a company whose stated strategy is to see Windows 10 running on all form factors, and a billion total devices by 2018. In fact, having a mobile component is a key part of Microsoft's developer pitch: Universal Windows Apps aren't much good if there aren't any phones to run them on. Why not then just stick with traditional Windows desktop apps and call it a day?

As weak as Windows phone is now, Microsoft can't just drop it entirely, or its whole platform will collapse. And there's still one last hope for Microsoft's phones now, and that's enterprise.

In the past couple of years, businesses have adopted Windows hybrid devices — those that can do double duty as both a PC and tablet — much faster than before. That's partially because technology has improved; it's easier for manufacturers to build touch-friendly convertible PCs without compromises and a competitive price. But it's also because of a Microsoft hardware success story called the Surface Pro.

"Two-in-ones have become one of the hottest segments in IT," says Tim Bajarin, president of analyst firm Creative Strategies. "The early ones were pretty clunky. But if you look at the new Surfaces and Lenovos, they're sleek." 

It took Microsoft a few tries to get it right, but it turned a corner in 2014 when it released the excellent Surface Pro 3. That product finally got the right mix of portability and power, and today the Surface line is the poster child for the adaptability of the Windows 10 platform. Businesses have responded, and the Surface Pro has set records for enterprise adoption.

If the Surface is supposed to be the textbook example of Windows running across for factors, there's still something missing: a Surface phone.

"There are still lots of companies using Microsoft devices and management software fairly exclusively, so there's likely something of an opportunity there," says Jan Dawson, chief analyst at Jackdaw Research. "They've demonstrated with Surface that they're able to mine some new niches in other markets and they might be able to do the same thing with business-centric phones."

With a Surface phone, Microsoft's enterprise pitch is that much stronger. Microsoft isn't offering businesses so much individual devices as a complete device solution. A Surface phone completes that offering: a set of adaptable, convertible high-end devices with native Microsoft software (which the businesses are running anyway) — not to mention Continuum, which means the Surface phone can effectively be your PC (albeit without the same power).

Microsoft is definitely working on such a device. After the announcement of the Surface Book last fall, product managers strongly alluded to eventually extending the Surface brand to mobile.

But how would Microsoft position such a phone? The Surface devices up till now have been designed and marketed as the epitome of the Microsoft goal of "reinventing productivity" — possibly the most effective tool in your arsenal in getting stuff done.

"We believe they are still committed to the Surface as an enterprise phone," says Bajarin. "I'm not sure there's going to be great innovation. The real value proposition is they are now selling complete solutions, and their enterprise stuff is more and more focused around the Surface branding."

However, with a phone, the productivity changes. A phone is inherently less about doing heads-down work and more about quicker, more direct tasks — it doesn't matter how well it runs Word as much as how efficiently it summons an Uber. Windows, unfortunately, stands out from iOS and Android in that its app catalog is woefully inefficient.

A pure enterprise-hardware play doesn't quite work either. To launch a Surface phone at a business-focused event that effectively tells consumers they shouldn't bother even looking at it is a bad a long-term strategy for the line. We've seen BlackBerry try to play the enterprise-only game and further diminish in profits and influence. 

What Microsoft should (and probably will) do with to market the Surface phone is one simple message: The phone that can replace your PC.

That's exactly what Continuum delivers, and the sentence is only a slight variation of what the Surface tablets have promised all along, and it has some appeal for consumers as well. Never needing to carry a laptop, or even a tablet, while on the go? And still run full apps from Microsoft and a few key partners? That has to have some appeal beyond enterprise.

Still, businesses will need to buy in first. And, as those first few Surface phone users get a taste of Continuum and the areas it can be most effective, they might even like it. It may be the long way around to getting people to "love Windows," as Nadella wants, but it's the only hope left for Microsoft's fortunes in mobile.

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