Microsoft Surface: The Software Giant Finally Figures Out Its Hardware Problem

26Jun12

Last week, Microsoft showed off some prototype tablet computers running Windows 8, the upcoming version (and radical redesign) of their flagship operating system. These devices, to be sold under the “Surface” brand, will be Microsoft-manufactured products. Since the preview, the tech blogosphere has been abuzz, in most part not about the devices themselves, but the fact that Microsoft will be making their own personal computers (PCs) for the first time, rather than supplying operating system and application software for other manufacturers.

Most reviewers have praised the devices themselves, giving them high marks for design and build quality. Much more copy has been devoted, though, to the effect Microsoft’s decision will have on companies such as Dell, Hewlett Packard, Acer and the like, the Original Equipment Manufacturers (OEMs) that have traditionally been the ones to manufacture PC hardware.

Microsoft Surface tablet PC unveiled last week.

One web story outlines how, by competing with its own OEMs, Microsoft has “thrown them under the bus.” Another states that Acer, one of the leading PC OEMs, thinks Microsoft “isn’t playing nice” by proposing to bypass their role in getting PC hardware out to the market. Yet another says that Surface will “shame the PC industry.

All I can say is, “It’s about time.” Let me explain.

For decades, the Microsoft/OEM “partnership” worked just fine. Microsoft would license its operating system (OS) software to manufacturers at a discount and the OEMs would build and market the hardware with the Microsoft operating system installed. OEMs competed for market share; this created a situation of ever-lowering prices for PC computers (which customers like) and an ever-broadening reach for the Windows/PC tech ecosystem. In short order, a Windows PC computer was found on nearly every desk on the planet, and Microsoft got a licensing fee for the OS software on every single one.

In the 1990’s there were several OEMs making Macintosh clones.

The situation changed fifteen years ago. When Steve Jobs returned to a nearly ruined Apple Computer in 1997, he refocused the company in an attempt to create the most perfect “user experience” for the technology customer. One of the first things Jobs did upon his return was to end the licensing of the Macintosh OS to clone manufacturers (yes, there were Mac clones in the 1990’s) and bring all hardware and software control back to Apple. Since then, Apple has invented and marketed a string of new products that have become the most desirable tech gadgets ever made, including the iPad, which represented an entirely new type of personal computer. Apple now stands as the most valuable tech company out there, the gold standard that other firms are trying desperately to emulate.

But the Microsoft/OEM partnership is having a difficult time competing on the “innovation and desirability” front. This is because of a number of underlying “cause and effect” situations:

  • The OEMs compete mainly on price, so there’s a continual effort to manufacture PCs for less money. At some point, this cost-cutting produces chintzy hardware made of materials that customers perceive as “cheap.” When enough of this stuff floods the market, it diminishes the public perception of all PC hardware.
  • When the profit margins on PC hardware drop to almost nothing (as is the case today), there’s no money for research and development (R&D). Without robust R&D expenditures, companies aren’t able to innovate and produce new tech products that capture customers’ imaginations. Right now, it could be argued that the R&D for companies such as Dell and Acer consists largely of looking at what Apple has done and trying to copy it at a lower price point. Customers aren’t fooled—they know the difference between real innovation and “me too” thinking.
  • To attempt to bolster the profitability of PC hardware sales, OEM’s created a new revenue stream for their companies. Third party software vendors would pay OEMs to pre-load their software on new PC hardware. This software was often “trial edition” versions of software that, it was hoped, the user would eventually purchase. The industry has less flattering terms for it, words like bloatware, shovelware and crapware. These unwanted add-ons can affect system performance and alter the Windows user experience to the point where no two PCs behave exactly the same. Getting rid of all this extra software (to get back to a “clean” Windows installation) can take hours, if it’s possible at all.

What does this all add up to? A Windows PC user experience that simply doesn’t match the expectations of today’s customers. Apple has set the bar in this area, and the Microsoft/OEM partnership can’t deliver it. Apple introduced the iPad two years ago and nobody has yet delivered a competing tablet that provides a compelling alternative while providing any sort of profit margin for the device maker. The imitators invariably fall back to competing on price and the whole vicious cycle repeats itself.

Which bring us back to the Microsoft Surface tablet PC. Unlike most OEMs, Microsoft is highly profitable and can engage in real R&D. They have the money to invent things. They’ve proven that they can create hardware—the Xbox gaming console is widely popular and well-regarded. It seems to me that in introducing a radical touch-based overhaul of Windows to a world accustomed to Apple’s design flair and attention to detail, they decided that they simply couldn’t trust the OEMs to get it right.

I’d agree with that. Microsoft knows that in being late to the tablet computing game, they need to deliver a perfect combination of software and hardware to regain relevancy in the new world of mobile computing, where customer expectations are higher than ever. Only by choosing to manufacture their own hardware can they ensure a user experience that could challenge Apple. The OEMs are simply going to have to step up their game or step aside.

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