Microsoft to cut up to 18,000 jobs over next year, including SoCal's Xbox Entertainment Studios

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Microsoft announced the biggest layoffs in its history Thursday, saying it will cut 18,000 jobs as it streamlines its Nokia mobile device business to focus on using the Windows Phone operating system.

Although the job cuts were expected, the extent of the eliminations is a surprise, amounting to 14 percent of the company's workforce. It's CEO Satya Nadella's boldest move since taking the reins from Steve Ballmer in February. Ballmer announced the Nokia acquisition last September, a month after he announced that he would resign.

In a public email to employees Thursday, Nadella said the changes were needed for the company to "become more agile and move faster."

The layoffs are set to impact Southern California — Microsoft is shuttering its Hollywood unit, Xbox Entertainment Studios, various sources including Deadline Hollywood reported. The Santa Monica studio will close in the next few months. The studio was tasked with producing video content for Xbox owners, with their biggest project being a "Halo" TV series which is expected to continue production.

Microsoft's Phil Spencer confirmed the closure in an internal memo, Deadline reported. Some staff will stay on to continue work on the "Halo" series and a technology documentary series called "Signal to Noise." They've also said they're committed to continuing interactive sports content, including "NFL on Xbox." Steven Spielberg's Amblin is a partner on the "Halo" series, with Spielberg executive producing.

The rest of their development slate, including dramas, sitcoms and animation, isn't mentioned in the memo and appears to not be going forward.

In her message to employees, 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.

"The first-party phone portfolio will align to Microsoft's strategic direction," Nadella said in the memo. "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 added the changes are "difficult, but necessary."

Of the job cuts, about 12,500 professional and factory jobs related to the Nokia acquisition will be eliminated, including 1,100 in Finland. Some 1,350 Seattle-area workers around Microsoft'sRedmond, Washington headquarters were also notified Thursday, as were 1,800 workers in Hungary.

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.

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 cut about 5,800 jobs in 2009. That was the company's first ever widespread layoff.

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.

Nokia phones ran a wide array of operating systems that weren't helpful to Microsoft's core Windows brand. One of the operating systems, Asha, lacked features like the ability to use mobile versions of Office productivity software or even GPS mapping ability.

Soon after the deal was announced, Nokia's overall handset sales plunged 29 percent in the final quarter of last year, even as its high-end Lumia devices grew quickly.

The Nokia purchase "is not a deal that (Nadella) agreed upon or negotiated or perhaps really wanted," said Scott Kessler, senior equity analyst at S&P Capital IQ. "Secondly it seems that the market has changed pretty significantly over the last year ... pretty traumatic cuts seem probably somewhat appropriate at this point."

In a letter to employees, Executive Vice President Stephen Elop said the company will drive sales of its Windows Phone by targeting the lower-price smartphone market with its Lumia devices.

A separate memo by a Microsoft executive in India posted by the BGR website said the company will stop engaging with developers on new apps for Nokia X, Asha and Series 40 phones, but maintain support for customers who own the phones.

In a blog post a week ago, Nadella hinted at the move, saying Microsoft had to "change and evolve" its culture for the "mobile-first and cloud-first world."

Nadella said Thursday that he would give more details when Redmond, Wash.-based Microsoftreports fiscal 2014 results on Tuesday. He will also address staff at a monthly question-and-answer session on Friday.

The cut was huge for Microsoft, the biggest in its 39-year history, but the company will still end up larger following the Nokia acquisition, which added about 28,000 employees to a total of 127,000 in June. The reduction would bring that down to 109,000, about 10,000 higher than a year ago.

In comparison, Hewlett-Packard Co., another tech giant buffeted by declining PC sales, is in the process of cutting 50,000 jobs from the 350,000 it had in May 2012.

Shares of Microsoft rose 70 cents, or 1.6 percent, to $44.79 in morning trading. The stock is up nearly 20 percent since the beginning of the year.

You can read the full memo from Spencer on the closure of Xbox Entertainment Studios below:

I hope you have had a chance to read today’s mails from Satya. I wanted to take a moment to share a few thoughts on what this means for our team and some of the changes we are making as a result.

In last week’s mail outlining some of the steps towards creating the culture and organization to bring our ambitions to life, Satya called out the strategic importance of Xbox as a strong consumer brand, a creative center for gaming and a leader in bold innovation. Every member of Team Xbox should be incredibly proud of the impact and reach your work has within the walls of Microsoft, with our developer community and most importantly, with consumers.

Microsoft is the productivity and platform company for a mobile-first and cloud-first world, and games are the single biggest digital life category in a mobile-first world. Success in this category, by growing a robust Xbox business, brings additional value to Microsoft. I have stated this before, but for Xbox to be successful, we must remain committed to being a consumer-driven organization with the mission of meeting the high expectations of a passionate fan base, to create the best games and to drive technical innovation.

As part of the planned reduction to our overall workforce announced today and in light of our organization’s mission, we plan to streamline a handful of portfolio and engineering development efforts across Xbox. One such plan is that, in the coming months, we expect to close Xbox Entertainment Studios. I would like to take this opportunity to recognize the accomplishments from the entire team in XES. They have built an impressive slate of original programming and pioneered interactive entertainment on Xbox, such as the innovative reality series ‘Every Street United’ that succeeded in uniting audiences around the globe during the recent World Cup. I am pleased that Nancy, Jordan and members of the XES team remain committed to new, original programming already in production like the upcoming documentary series ‘Signal to Noise’ whose first installment takes on the rise and fall of gaming icon Atari and of course, the upcoming game franchise series ‘Halo: Nightfall,’ and the ‘Halo’ Television series which will continue as planned with 343 Industries. Xbox will continue to support and deliver interactive sports content like ‘NFL on Xbox,’ and we will continue to enhance our entertainment offering on console by innovating the TV experience through the monthly console updates. Additionally, our app partnerships with world-class content providers bringing entertainment, sports and TV content to Xbox customers around the world are not impacted by this organizational change in any way and remain an important component of our Xbox strategy.

Change is never easy, but I believe the changes announced today help us better align with our long-term goals. We have an incredible opportunity ahead of us to define what the next generation of gaming looks like for the growing Xbox community. I have a great deal of confidence in this team and know that with clarity of focus on our mission and our customers we can accomplish great things together. We already have.

Microsoft has released publicly the memo Nadella delivered to staff. Here's the text of that memo:

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 theMicrosoft 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.

Satya

This story has been updated. 

With contributions by KPCC staff

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