Hardware Manufacturers On A Slippery Surface - Or Do They Know Better?

Last month, Microsoft announced the launch of its own Windows8 tablet, the Surface. Everyone and their uncle was expecting a Windows 8 tablet to come out soon but what moved the ground from under one’s feet was that Microsoft will make it themselves! I mean, not just the software, they will make the hardware as well. It was actually a bit funny to read how Steve Ballmer felt that software and hardware together always made sense. Microsoft has become one of the largest companies in the world by licensing its software to independent hardware manufacturers and now he says this! 

Is there more beneath the Surface? 

Anyway, for once, it seems, Microsoft has aroused the curiosity of the entire tech world. A lot of questions are up in the air as Microsoft is not ready yet to give out the full details. But the biggest question of them all is that whether it is the beginning of the end of the OEM model wherein Microsoft supplied the software while manufacturers like Dell, HP, Acer, Lenovo, Sony etc created the hardware. Hardware manufacturing has been a low margin business ever since Wintel (Windows + Intel) became more important. If you had Windows and Intel, it didn’t really matter whether your laptop was a Dell, HP, or Vaio or even an "assembled" non branded one except perhaps in looks and some other non-critical features. Since the critical parts were always owned by Microsoft and Intel, they got majority of the profit.

On the other hand, Apple, with its own proprietary software and hardware solution, seemed to be creating a better product and thus some people have been attributing Apple’s success to its ownership of both aspects. However, I believe, in case of Apple also, it is the software that wins; not to say their hardware is ordinary but I guess if Apple were to license its OS today, the Dells and HPs of the world would happily be able to create Apple laptops but would they be able to charge a nice premium like Apple? Especially as Acer, Lenovo, Sony, Samsung and every other manufacturer also gets ready to sell its own Apple laptop? Probably no, because the differentiation that an Apple device has today tends to diminish. Today, Samsung, HTC, Asus seem to be set for such a future because people are not really able to differentiate between a Samsung Galaxy S III and a HTC One.

So, point is that creating software is getting margins in the industry but hardware is becoming a commodity as there seems to be little scope for differentiation. Also, could it also be that tight margins on hardware would limit the R&D expense for future innovations? Did that realization drive Microsoft into creating its own hardware?

What should the hardware manufacturers do?

I guess no one knows the answer for sure. However, I would like to point to a few trends in the industry via some news items I picked up recently. Those seem to indicate that a number of hardware manufacturers are looking towards focusing on some aspect / segment of the industry and create differentiation. Here are some of them.

From "Dell recommends Windows" to "Dell recommends Dell"?

Dell, for one, seems to be sure that it needs to move away from the low margin PC business, including making tablets with other's software. It has been making strides towards enterprise and has been enhancing its own software portfolio to differentiate its enterprise servers from the commodity category. It is also ramping up on its software services business. Latest in these efforts is its bid to buy Quest software. 

 

Dell has also recently decided to sell laptops based on Ubuntu. These are targeted at developers at web companies because a lot of these people have indicated Ubuntu Linux as their OS of choice. There is no other manufacturer catering to this segment but only time can tell whether it will succeed or not – but again, the point is, Dell is trying things beyond Windows now!

Samsung: Everyone's Invited! (except Motorola?)

Samsung has recently reiterated that it will focus more on software. With its strength in hardware, it seems to be on the right path. Samsung's Bada is not a huge success, yet, but it has already started putting money into another Linux based mobile OS, Tizen, by becoming a platinum member of the Linux foundation, which carries a $500,000 fee. Is it preparing for the day when Google finally uses Motorola for manufacturing devices?

 

We already know that Apple is pushing Google out of the iPhone, slowly but surely. I read on a website that about half of Google Maps' traffic is from Apple devices. So, this move will definitely hit Google. Google recently launched its own Nexus7 tablet, which is not really its own as it is manufactured by Asus in some sort of partnership. The big point was that Google seemed to be targeting Amazon's Kindle Fire rather than the iPad. And Amazon seems to be on top of its game as well - it has now bought a map startup company, UpNext - another exit for Google Maps? So it appears that Amazon also is looking for its own product rather than just be a hardware manufacturer using Google’s software (it does use Android still though).

Sony has been beaten by Samsung at its own game of TVs. It has even taken away the innovative positioning of Sony with its alliances with Google and focus on smart TVs and tablets. Sony has been suffering losses in TVs for some years and is now seeing growing competition in the video games market. Sony, thus, seems to be enhancing focus on its gaming to get back from red.

Past performance is no guarantee of future performance? 

It is interesting to see how companies are moving away from the strategies that made them successful. Dell’s original path to the top, direct selling, was innovative and helped it in this low margin business. That was its differentiation back then. Today, it is no longer differentiated as everyone does that. Samsung has sold so many smart phones because of Google’s OS underneath. But how does it compete with HTC and Asus then? All the companies I mentioned above seem to want to move from the low margin commodity business of hardware manufacturing to higher margin differentiated businesses. It seems to be a step in the right direction, especially in today's options-flooded market where the consumer will buy your product not because it is as good as the other’s but only if your product is better than the other’s.

 

What do you think? Is it just a fad or a better way to compete in the market?