Last week, Microsoft published its latest earnings report, revealing details of a strong quarter for its Cloud and Office businesses, but a less successful few months for its hardware business. Surface revenue declined by 26% - a situation that Microsoft will be hoping to reverse with the help of its new Surface Laptop - but its phone revenue was practically obliterated.
During the first three months of 2017, Microsoft's phone hardware generated just $5 million in sales worldwide, compared with $1.4 billion during the same quarter two years earlier. The handsets that it continues to sell are around 18 months old now, and there's been no hint of any direct replacements for them on the way.
With its global smartphone market share below 1%, and Microsoft predicting "negligible revenue" from phones next quarter, its mobile hardware business is effectively dead - for now. However, its CEO, Satya Nadella, told Molly Wood this week that the company will make more phones, but added that they won't be recognizable as the devices that we typically consider 'phones' today.
Molly Wood: "Do you think you're going to make more phones?"
Satya Nadella: "We make phones today. We have OEMs like HP making phones, and others. We've picked a very specific area to focus on, which is management security, and this one particular area called Continuum, which is a phone that can even be a desktop. And at this point, we're making sure that all of our software is available on iOS and Android, and it's first.
And we're looking for 'what's the next change in form and function?' What we've done with Surface is a good example. No-one before us had thought of 2-in-1s, and we created that category, and made it a successful category, to the point where there are more 2-in-1s coming, and that's what we want to do. So in a sense, when you say 'will we make more phones?', I'm sure we will make more phones, but they will not look like phones that are there today."
Nadella's assertion that Microsoft's future phones "will not look like phones" will no doubt fuel the hopes of those wishing for the company to realize the patent it was granted earlier this year for foldable handsets. Similar in concept to fictional devices that appeared in HBO TV series Westworld, the patent showed various theoretical designs for handsets that can be opened up to become tablet-style devices; other manufacturers have previously showcased their visions for such devices too, including Samsung. Of course, patents can often be unreliable indicators of actual product development.
For some time now, Microsoft has been rumored to be working on a new class of mobile device with powerful hardware and the dual phone-and-PC functionality of its Continuum vision in Windows 10 Mobile. Commonly referred to as the 'Surface phone', rumors of that device have become closely linked with Microsoft's promise to bring the full version of Windows 10 to next-generation 'cellular PCs' with ARM processors, including support for Win32 desktop applications through emulation. That functionality will become increasingly important as Microsoft places greater emphasis on availability of desktop apps from the Windows Store, following the launch of its new Windows 10 S edition.
Nadella's reference to Microsoft's Surface line as a good example of creating new hardware categories supports the notion that its next phone will be distinctive from the current crop of mobile devices. But the mobile market is moving quickly. Samsung has already released its own version of Microsoft's PC-like Continuum experience, DeX, which is available on its latest Galaxy S8 and S8+ flagships, and has made clear its ambitions to bring foldable form factors to market.
For now, all we know is that Microsoft is working on something to resurrect its mobile hardware business, and the company appears to be distancing those efforts from its previous smartphone products.