LOS ANGELES — Microsoft announced the biggest layoffs in its 39-year history Thursday, outlining plans to cut 18,000 jobs in a move that marked the CEO’s sharpest pivot yet away from his predecessor’s drive for the company to make its own devices.
Although some cuts had been expected ever since Microsoft acquired Nokia’s mobile-device unit, the number amounted to 14 percent of the Microsoft workforce — about twice what analysts had estimated.
The cuts will include about 12,500 jobs associated with the Nokia unit — nearly half of the 28,000 employees Microsoft brought on board in April through the acquisition.
When the cuts are complete, the company will still have about 10,000 more employees than before the Nokia acquisition, with an overall headcount of 109,000.
In a public email to employees, CEO Satya Nadella said the changes were needed for the company to “become more agile and move faster.” The move also pushes Nokia to focus solely on the Windows Phone operating system.
Nadella is clearly backing away from former CEO Steve Ballmer’s strategy of getting Microsoft to make its own smartphones and tablets.
“He’s making a pretty serious game-changing strategy move away from hardware,” said Michael Turits, managing director of equity research for financial services company Raymond James & Associates.
Nadella indicated that Microsoft will largely abandon low-price Nokia Asha phones — which work on their own non-Windows operating system — and reverse a strategically questionable move by Nokia in February to launch a line of phones called “X” that supported rival Google Inc.’s Android platform.
“To win in the higher price tiers, we will focus on breakthrough innovation that expresses and enlivens Microsoft’s digital work and digital life experiences,” Nadella said in the memo.
Cuts begin worldwide
About 1,350 Seattle-area workers around Microsoft’s Redmond, Wash., headquarters were laid off Thursday, as were 1,800 workers in Hungary and nearly 370 in San Diego. The Nokia cuts include 1,100 jobs in Finland.
In addition, the company is closing its Xbox Entertainment Studios, a 2-year-old venture based in Santa Monica, Calif., that produced original video content but was seen as separate from Microsoft’s core business.
Microsoft Corp. expects charges of $1.1 billion to $1.6 billion over the next four quarters, largely for severance payments. The move puts the company on track to meet the target it set in September, when it announced the Nokia purchase, of saving $600 million in annual costs within 18 months after the deal closed. Ballmer announced the Nokia deal a month after he said he was resigning.
FBR Capital Markets analyst Daniel Ives said the cuts were about double what Wall Street was expecting.
“Microsoft needs to be a leaner and meaner technology giant over the coming years in order to strike the right balance of growth and profitability around its cloud and mobile endeavors,” he said.
The move dwarfs Microsoft’s previous biggest job cut, when it eliminated about 5,800 jobs in 2009. That was the company’s first widespread layoff.
Focus is shifting
Microsoft has been shifting its focus from traditional PC software to cloud computing and cloud-based products like its Office 365 productivity software that can operate on mobile devices.
With its $7.3 billion acquisition of Nokia’s cellphone business, Microsoft had sought to meld its software and hardware business into a cohesive package, similar to rival Apple.
But investors had lingering doubts about the strategy, especially because the two brands’ market share in smartphones and tablets was so far behind Apple and Samsung.
From: Satya Nadella
To: All Employees
Date: July 17, 2014 at 5:00 a.m. PT
Subject: Starting to Evolve Our Organization and Culture
Last week in my email to you I synthesized our strategic direction as a productivity and platform company. Having a clear focus is the start of the journey, not the end. The more difficult steps are creating the organization and culture to bring our ambitions to life. Today I’ll share more on how we’re moving forward. On July 22, during our public earnings call, I’ll share further specifics on where we are focusing our innovation investments.
The first step to building the right organization for our ambitions is to realign our workforce. With this in mind, we will begin to reduce the size of our overall workforce by up to 18,000 jobs in the next year. Of that total, our work toward synergies and strategic alignment on Nokia Devices and Services is expected to account for about 12,500 jobs, comprising both professional and factory workers. We are moving now to start reducing the first 13,000 positions, and the vast majority of employees whose jobs will be eliminated will be notified over the next six months. It’s important to note that while we are eliminating roles in some areas, we are adding roles in certain other strategic areas. My promise to you is that we will go through this process in the most thoughtful and transparent way possible. We will offer severance to all employees impacted by these changes, as well as job transition help in many locations, and everyone can expect to be treated with the respect they deserve for their contributions to this company.
Later today your Senior Leadership Team member will share more on what to expect in your organization. Our workforce reductions are mainly driven by two outcomes: work simplification as well as Nokia Devices and Services integration synergies and strategic alignment.
First, we will simplify the way we work to drive greater accountability, become more agile and move faster. As part of modernizing our engineering processes the expectations we have from each of our disciplines will change. In addition, we plan to have fewer layers of management, both top down and sideways, to accelerate the flow of information and decision making. This includes flattening organizations and increasing the span of control of people managers. In addition, our business processes and support models will be more lean and efficient with greater trust between teams. The overall result of these changes will be more productive, impactful teams across Microsoft. These changes will affect both the Microsoft workforce and our vendor staff. Each organization is starting at different points and moving at different paces.
Second, we are working to integrate the Nokia Devices and Services teams into Microsoft. We will realize the synergies to which we committed when we announced the acquisition last September. The first-party phone portfolio will align to Microsoft’s strategic direction. To win in the higher price tiers, we will focus on breakthrough innovation that expresses and enlivens Microsoft’s digital work and digital life experiences. In addition, we plan to shift select Nokia X product designs to become Lumia products running Windows. This builds on our success in the affordable smartphone space and aligns with our focus on Windows Universal Apps.
Making these decisions to change are difficult, but necessary. I want to invite you to my monthly Q&A event tomorrow. I hope you can join, and I hope you will ask any question that’s on your mind. Thank you for your support as we start to take steps forward in evolving our organization and culture.