Why is Microsoft Competing with its Hardware Partners?

I just read a great article in Computerworld by Mike Elgan about Microsoft doing what was once unthinkable – competing with its partners.

In the old days, the roles were pretty simple, Elgan asserts. Microsoft created the OS and OEMs made the hardware. Fairly easy for all parties to understand.

Folks like Google, after they got into the OS business – Chrome and later, spectacularly, Android – followed suit with smartphones by letting its OEMs put out devices while they focused on the software.

In the meantime of course, they cast envious eyes at Apple, who controlled their entire ecosystem, from iOS to the iPhone and made out like a bandit, margin-wise.

Google of course, were the first to buck convention with the introduction of their Nexus One smartphone, which they had HTC manufacture. Elgin puts it this way;

What was shocking about the phone was that, for some reason, Google decided to compete directly against its OEM hardware partners. And that was something you just didn’t do.

The Nexus One was not a success, but Google kept plugging on and recently released not one but THREE devices, the Nexus 4, 7, and 10. The comprise a smartphone, mini-tablet and tablet. Google also acquired Motorola bringing it squarely against their OEMs.

Microsoft of course, has now entered the market with the Surface RT and the Surface Pro, also in direct competition with its OEMs, some of whom are bitter about it.

Elgan explores another reason for OS vendors’ entry into hardware:

Both Google and Microsoft have been frustrated not only by Apple’s success, but by the fact that they’re being held back by lackluster products from their partners. Both companies have separately come to the conclusion that they’ve got nothing to lose by competing with partners. After all, not competing with them is getting them nothing but dashed hopes and massive problems.

It is not inconceivable that Microsoft will release a smartphone before too long. One major reason is the simple market opportunity that is presented by hardware.

Microsoft and Google have huge brand names and many customers, Elgan points out, would be more comfortable buying hardware from Microsoft or Google.

The “ecosystem” is all we hear today – referring to apps, OS, and browsers. Now we have to throw hardware into the mix.

I’m fairly sure that in the next year or two, Apple, Microsoft and Google (perhaps Facebook too) will have wide product offerings – the opportunities are too good to pass up.

The Future
Well, the question is: what will happen to the long-faithful OEMs? The answer is brutal. They will face more competition and may end up simply subcontracting for the OS vendors.

Apple is certainly the model that Google and Microsoft have in mind, with the mouth-watering margins. Google for example, has no licensing fees for Android, depending on follow-on business through their Apps.

Hardware margins are a different story. Initial stock of Google’s Nexus models and Microsoft’s Surface were sold out quickly and they will suffer this holiday season for not properly estimating demand.

Once their supply chain issues are over and they begin to enjoy the margins (greater for Microsoft, smaller for Google), they will never return to the software-only business models.

Once they fully embrace the role of competitors, look for relationships with OEMs to deteriorate or at the very least to become muddled. Money does that.

The head of HP’s PC business, Todd Bradley, has already declared himself unimpressed by the Surface, according to Business Insider;

He had some pretty sharp things to say about the Surface to Citeworld’s Matt Rosoff, insisting that the press has “made a bigger deal out of Surface” than it deserves.
“I’d hardly call Surface competition,” Bradley told Rosoff. “One, very limited distribution. It tends to be slow and a little kludgy as you use it …. It’s expensive.”

So in summary, expect competition, with all that entails – snarkiness included.  Also, expect more Microsoft products, tablets, smartphones and perhaps less likely, desktops and servers. (But which IT managers running Windows Server wouldn’t seriously consider Microsoft-branded servers?)

A brave new world.

Let me know what you think.

Leave a Reply