Windows Phone is in trouble. Despite spending around $7.2 billion to acquire Nokia’s phone business, Microsoft isn’t making any money out of Windows Phones and has decided to write off most of its Nokia deal to the tune of $7.6 billion today. Microsoft CEO Satya Nadella has been cleaning out former Nokia executives recently, and just made a decision to cut another 7,800 jobs primarily in the company’s phone business. Nadella doesn’t want to be in the business of mass-producing multiple phones anymore — he wants Microsoft to focus on what it can do well with mobile now and in the future. Windows Phones still matter to Microsoft, just not in the traditional sense. Nadella has new plans for Lumia, and they involve flagships, low-cost devices, and business phones, but beyond that, the future of Windows Phone is very vague.

Although Microsoft doesn’t want to admit it, the company has lost out on mobile. That much is clear from weak Windows Phone sales, a lack of carrier interest, and no real support from global phone brands like HTC, Samsung, Sony, and LG. Mixed together with a lack of interest from developers to create apps for Microsoft’s platform, the situation makes it difficult to convince consumers to buy Windows Phones, let alone device makers to create them.

Nadella has talked about the need to drive costs down for the company’s phone business, and Microsoft has been focused on low-end Lumia devices for quite some time. While Lumia sales have been increasing thanks to cheaper devices, overall market share has actually decreased because Android and iOS are still growing quicker.

In other words, Microsoft is stuck — so what can it do?

Nadella’s restructuring will likely reduce the phone business’ confusing numbering schemes and huge selection of handsets, but Nadella doesn’t really clarify what it all means, simply saying it will be a "more effective phone portfolio" with "better products."

Microsoft’s new approach feels like it might be similar to Apple’s small selection of iPhones, but Microsoft doesn't share Apple's deep mobile ecosystem to attract consumers in the same way. Microsoft’s plan has been to grow market share through more handset sales while attracting app developers to create a mobile ecosystem, but that plan has obviously failed.

Microsoft’s previous message had been that universal apps and Windows 10 can spur interest in Windows Phones, but a similar promise for Windows 8 and its touch-friendly tiled interface didn’t work out. Now, the message is much more mixed. With the addition of Android and iOS app support for Windows 10 Mobile, Microsoft has signaled to developers that it’s okay to ignore developing directly for Windows on mobile devices and just port existing apps across. Combine that with some changes Microsoft is making to the interface and features of Windows 10 Mobile, Cortana for iOS / Android, and a continued mobile push on rival platforms, and it’s easy to conclude that Windows Phone has very few unique capabilities anymore.

Even if it can begin to solve the app gap issue, it’s still unclear whether third-party manufacturers are willing to come back to Windows Phone. With Microsoft’s Lumia phones accounting for more than 90 percent of Windows Phone marketshare, it’s unlikely that any other phone maker like Samsung, LG, or HTC will step in to create Windows Phones at scale to fill the gap and truly make it a viable third ecosystem.

This restructuring could result in a small selection of phones that are more like Microsoft’s Surface range of tablets, simple options that are focused on their respective price points. Windows chief Terry Myerson is taking over all of Microsoft’s device businesses, including Xbox, Surface, Lumia, HoloLens, and the Microsoft Band. By merging the Windows engineering and devices teams together, you could reasonably expect that future phones will be closely integrated and pick up unique features for Windows users. That might be the case — after all, Myerson was behind Microsoft’s secret efforts to build a Surface Phone. This strategy might work for business phones and flagship devices for Windows fans, but that’s a small market compared to mobile overall. But perhaps that’s the reality of Microsoft’s mobile situation.

Ultimately, Microsoft is now being forced to skate to where the puck will be, not where it has been. If you believe technology companies, then we’ll all be wearing computers in the future and letting them drive us around. If you look at where Microsoft sees the future — HoloLens — then it’s clear the company sees its mobile future focused outside the smartphone. "Our reinvention will be centered on creating mobility of experiences across the entire device family including phones," says Nadella — but in order to do that, Microsoft needs a lot of data from sensors and a deeper understanding of the world to move computing beyond a desk or pocket and into every aspect of our lives. Microsoft already learns a lot from its Xbox Live efforts, whether it’s consumer habits or machine learning, and it needs those millions of Windows Phones out there right now to learn from the many sensors in these modern devices. Likewise, the Microsoft Band provides rich data, and its appearance right now feels like a research lab project. By moving phones and devices into the Windows division, it’s clear that the company is setting itself up to try not to miss the next personal wave of computing.

It’s hard to imagine Microsoft will kill off its Lumia line fully, because it still needs to be invested in smartphones for its own mobile apps and services. Even Nadella says that’s not going to happen, stating that he is "committed to our first-party devices including phones." By aligning Lumia, Surface, and Xbox with the Windows division, it’s easy to mask any continued losses and keep funding them without investors pushing Microsoft too hard. It’s also a more realistic view of where Windows Phone stands today: a test project. It's a little like Google's Nexus program: a thing Microsoft feels compelled to make so it has a mobile platform to work with. But unlike the Nexus program, there's not a viable ecosystem of phone makes or app developers right now that it can inspire. If it was anything more at this point, Microsoft would have made a far larger investment in its software.

Windows 10 Mobile is coming later in the year after Windows 10 for PCs, and with only a few months to go it’s in a rough preview state. Microsoft is increasingly focused on keeping its enterprise base of loyal PC users happy for Windows 10, and not on mobile or the touch interfaces that Windows 8 users disliked. It feels like Microsoft is admitting defeat and readying itself for a different kind of mobile future instead of worrying about the smartphone war it will never win.

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