Google, Amazon, the Chinese, and the Hardware Brands of Tomorrow

Google’s hardware strategy has always felt less like a strategy and more like a string of experiments. It is understandable why a company like Google is interested in their own hardware. In many ways, Google and Amazon are alike in that their business model opens the door to a “hardware as a service” offering. They can offer lower prices on hardware because the bulk of their revenue can be made up in other ways the hardware enables. Amazon uses hardware as a service to drive engagement with their other businesses and Google can use hardware to collect data and provide other services to monetize. Amazon has had a much better track record in hardware than Google, yet it is becoming clear Google is getting a bit more serious about their own hardware initiatives.

I had sensed this drive to own some core hardware experiences since their acquisition of Motorola. However, with the recent hiring of former Motorola chief Rick Osterloh, it seems their hardware initiatives are being kicked up a notch.

Google will likely continue the Nexus initiative, although I don’t see this strategy working for them anymore given the state of the smartphone market. But recent rumors suggest a VR headset could be in the works and even a device like the Amazon Echo. They have Nest, Dropbox, and more hardware acquisitions could be likely — perhaps Fitbit? But it is clear hardware is getting more attention and, given the common economics for most consumer hardware vendors (with the exception of Apple) it makes sense Google makes a play at hardware when they can make revenue from that hardware in other ways.

This is why Amazon’s hardware strategy, and even Xiaomi’s, were widely discussed. These companies looked to be pricing hardware aggressively in the hopes to make that money up and then some from services. Consumer hardware has always traditionally been a low margin game. Apple is the rare exception. For everyone else, you can’t live on hardware margins alone. I’ve made this point for years that the economics of consumer hardware will mean the hardware landscape will change. Companies who had a good run during the growth cycle will not remain in the long haul if they can’t figure out how to make money beyond the hardware. Again, Apple excluded.

So perhaps, with this current and clear hardware slowdown we are seeing in all the major categories from PC, smartphones, and tablets, it is time to recognize the major hardware players of the future are likely going to be companies whose business models do not depend on hardware. Amazon and Google are the signposts pointing us in this direction.

The other possible scenario is a flood of Chinese brands make up a sizable chunk of the hardware brands of tomorrow. This group of hardware manufacturers seems content to live on small margins but large scale and, as long as the cost of wages and living in China does not go up, this group has a chance at competing in many consumer hardware categories with rock bottom prices. They would still need to develop their brands the way Sony, LG, Samsung, and other Asian brands have, but Huawei is clearly looking to do this and, if they are successful, I’d be willing to bet many other Chinese OEMs follow. I can see a scenario where Chinese brands do to Korean brands what Korean brands did to Japanese brands. This effort could span TVs, refrigerators, dryers, and all kinds of electronics.

The past 10 years were a good run for most companies with a hardware-centric business model. But other than Apple, I’m convinced that business model will be challenged for many going forward. Which means the hardware brands of old may likely not be the hardware brands of tomorrow. I think we are at an inflection point where we will look back at this period of time when a business model shift occurred in consumer technology.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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