Microsoft’s Surface Result of Lost Faith in Partners, Report

| Analysis

Microsoft decided to developed its own tablet, the Surface, after losing faith in its PC hardware partners, according to The New York Times. Microsoft was concerned about the PC industry’s inability and unwillingness to match Apple’s control over the supply chain, as well as Apple’s ability to integrate hardware and software, and the company eventually decided it would have to strike out on its own with the Surface.

You Gotta Have Faith...

You Gotta Have Faith…

Apple’s whole widget business model, wherein it owns the hardware and the software, was, for a long time, a disadvantage in the PC market. In the 1990s, Apple lost market share quarter after quarter, and year after year, in part because Microsoft’s open licensing ecosystem allowed PC licensees to clobber Apple on price.

Starting with the iPhone, the MacBook Air, and then the iPad, Apple found a way to definitively turn its whole widget control into an advantage by buying in such large quantities the company could effectively corner the market on key components. Apple bought up enormous quantities of high-quality aluminum, for instance, that ended up going into all three products at one time or another.

According to unnamed sources speaking to The Times, Microsoft was stunned at how far Apple was willing to go to lock up supply of these key components. The end result is that Apple has been a pricing leader for ultrabooks (which were modeled after Apple’s MacBooK Air) and in tablets.

Microsoft apparently recognized some time ago that the fact that its PC partners were unwilling or unable to do the same thing represented a big threat to its Windows empire. This was especially true in the mobile market, which Microsoft also realized would be a big part of the computing industry going forward.

“You’ve got this sclerotic partnership structure where the partners don’t have any oxygen to be innovative,” venture capitalist Lou Mazzucchelli told The Times. “I believe Microsoft was painted into a corner. If they’ve didn’t move soon, Apple would have so much of a lead, it would be almost impossible to catch them.”

It’s a corner of its own design, however; Microsoft has long made more money on the sale of each PC because the company’s margins were many orders of magnitude higher than the hardware margins on the low-end, cheap PCs that make up the bulk of the industry. Apple has earned some 90 percent of the money in the over-US$1,000 computer market for years, and that’s where the hardware profits reside.

In other words, while Microsoft has long extolled the benefits and superiority of open licensing, the reality is that open licensing leaves the industry with no room whatsoever to make the kind of investments in manufacturing and the supply chain that Apple does on a daily basis.

HP was the proverbial straw that broke the camel’s back, according to the article. While HP and Microsoft worked together on the HP Slate that was introduced at CES in January of 2010, when the device headed into production, HP made a series of good-enough choices that resulted in the Windows 7-powered HP Slate 500 being not-at-all good-enough.

For its part, HP felt that Microsoft wasn’t delivering software that was anywhere near as good as Apple’s iOS, especially for touch control, and this was apparently a complaint shared by several of Microsoft’s licensees.

That means on the one hand, Microsoft was losing faith in its licensees to deliver hardware that could compete with the iPad, while those same licensees were losing faith in Microsoft to deliver software that could compete with the iPad.

Ouch.

In a statement, Microsoft denied these charges in a round-about way. Microsoft VP Steven Guggenheimer told The Times that its partners were not part of the decision-making process to introduce the Microsoft Surface tablet.

“Microsoft has tremendous respect for our hardware partners and the innovation they bring to the Windows ecosystem,” Mr. Guggenheimer said. “We are looking forward to the incredible range of new devices they are bringing out for Windows 8.”

That’s pretty talk for PR-speak, but the reality is that Microsoft is damned either way: If true, that means Microsoft blithely ignored how the Surface might effect relationships with its hardware partners. If it’s not true, it’s an outright condemnation of those same partners. Either way, Microsoft is saying it can do this better than those partners.

Ouch.

After years of effectively sitting on the sidelines in the industry it theoretically introduced to the world in 2000, Microsoft may finally be understanding that open licensing has weaknesses to go with its strengths. If all you care about is rush-to-the-bottom cheap products, it’s awesome.

If you want hardware profits high enough to sustain research and development, the whole widget offers distinct advantages. With the media tablet market, which has different needs and wants than desktop computing, the whole widget is winning, and the Surface shows that Microsoft wants in on the action.

Of course, it still has to deliver. The reality is that there are more unknowns than knowns with the Surface, including such niceties as pricing, availability, and most of its basic specs.

Comments

skipaq

They need good divorce attourneys before their spat becomes a PR mess. Nah! It will be entertaining. Let the wrangling begin.

geoduck

I think there is a space here for a third OS. If somebody came in with a Windows replacement that would run on inexpensive hardware, would run a decent assortment of software, would save files that were compatible with Windows and MacOS, be dumb as a post simple to use, and could be licensed for $10-$20 a box I think a number of hardware vendors would give it a shot to get the MS monkey off of their back.

Who could it be? Linux has had a shot and never really came together. I’m not sure Android would be adaptable to a desktop environment (ironically this is the same issue MS is facing in trying to push Windows8 onto portable devices), Chrome seems to have lost momentum.

Is there anyone out there with a third option?

FreedomRadio

Microsoft has just started the snowball going down the hill. It can’t stop it now.

Bosco (Brad Hutchings)

Apple has had some 90 percent of the over-US$1,000 computer market for years, and that?s where the hardware profits reside.

TMO reported in May that this was actually “just” 66%. IIRC, the 90% number is the share of dollars for computers priced over $1000. See the first sentence of this article for example. It’s a feel-good statistic that is shocking if it’s slightly mis- or sloppily stated or heard by someone who isn’t good at math.

Lloyd

“Analysis: Microsoft’s Surface Result of Lost Faith in Partners”

Actually it’s a classic Microsoft redirect as it Microsofts customers, that having had their eyes opened, have lost faith in Microsoft.

The failure is in fact Windows 8 and Microsoft hardware is NOT going to change that fact.

Bryan Chaffin

Thanks for the catch, Brad. I’d forgotten about that!

I reworded that sentence to be more accurate.

MacFrogger

Geoduck said:

I think there is a space here for a third OS.

I agree with you - but what?  And from whom?  Clearly Microsoft agrees with you too, at least in mobile, where they aim to muscle in on iOS and Android.  So why not a third OS to go up against Windows and OSX?

Aftermac

Apple?s whole widget business model, wherein it owns the hardware and the software, was, for a long time, a disadvantage in the PC market. In the 1990s, Apple lost market share quarter after quarter, and year after year, in part because Microsoft?s open licensing ecosystem allowed PC licensees to clobber Apple on price.

Bryan, to be fair Apple’s market share losses in the 1990s didn’t have as much to to with their whole widget business model, as it did with a total lack of revolutionary products. The only products that came close are the Newton and *maybe* the Quicktake, and Apple failed to own those markets. Sure the Mac was lightyears ahead in the late 80s and early 90s, but Apple let it stagnate. After the PowerBook 100 and until the iMac there was more evolution than revolution.

iJack

My gawd!  I’d completely forgotten the QuickTake.
Prolly just as well.

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