If you are a technology company—not named Apple—then the answer to this question is vital to your future. The fact of the matter is that all technology companies, other than Apple, do not solely control their own future. Samsung, HP, Acer, Dell, Lenovo, LG, HTC, Nokia, etc., must rely on either Google or Microsoft for their operating system for the smartphones, tablets, and or PCs they choose to make. So the answer to the question, Google or Microsoft, is as strategic as it gets. Making a wrong decision could mean the end of your company.
Right now Google’s platforms are the hot ticket item. But they come with a price, or a lack of a price for that matter. Google would prefer that all hardware that runs their software be virtually free. That may seem counter to the logic of them releasing a ChromeBook for $1200 but that is simply a strategy to take advantage of a particular market and get early adopters to pay them for their own market research. It is actually quite brilliant.
The long game, however, for Google is one where their services are running on every device and getting there requires the hardware be practically free. This is the world I firmly believe Google wants to see happen. So if I am one of the aforementioned brands trying to make money in the hardware game, I should be mindful of betting my future on a company who would rather me not make any money on my hardware. Also, Google gets almost all of the ad revenue that comes through Android devices. In Samsung’s case, they get 10% but the rest goes to Google. Who really makes money in this case? If you say Google, you are correct; this is part of their end game. How do others make money?
Microsoft
Microsoft on the other hand genuinely wants their hardware partners to make money. This is why they offer a healthy premium on the license of their software. The assumption is that Microsoft software adds value and is therefore valuable. That value should translate into a reasonable price willing to be paid by the mass market in order to capture that value. This was how it worked for nearly two decades in the peak of the PC era so is there reason to believe it will not work again with devices in the post-PC era?
The challenge with Microsoft is that their ecosystem, mainly in apps, is well behind that of Google. To put all your eggs, or even most your eggs, in Microsoft’s basket brings with it the assumption that they will yet again get it right someday, after many tries. Maybe they will.
The Universal Downside
There is a downside to licensing someone else’s software as the main software interface your customers will be using. Actually there are several. First the hardware manufacturer does not actually own the end consumer. This creates platform loyalty but not hardware loyalty. In this scenario, the next time a consumer needs to by a new PC, smartphone, or tablet, they may stay loyal to Microsoft or Google, but said hardware manufacturer must now compete for that customer each time they go back to buy new hardware.
Building out the downside of platform loyalty for the hardware manufacturer comes with it the other challenge of licensing someone else’s software. Your competitors may also license that software which makes standing out or differentiating much more difficult. It is this differentiation, which must go beyond hardware, that can begin to create customer loyalty. But when all your competitors, not named Apple, are running the same software as you, it makes it difficult to stand out in a crowd. I call this the sea of sameness and its getting bigger and deeper every year. Standing out in the sea of sameness is the biggest downside of licensing someone else’s software.
This is why there must be and there will be consolidation in the hardware side of this industry. The current players can not keep going the route they are going forever. Companies may make a go at building their own OS, but they risk losing time and resources to the dominant players. The platform providers like Microsoft and Google, may also start making more of their own hardware, which will complicate matters even further and cause consolidation to happen even faster.
These are certainly tricky waters to navigate and for those who have done this before they are in uncharted territory. The companies that survive the turbulent waters of the sea of sameness will either sail through or sink with the flag of Google or Microsoft mounted high on their mast.
I try to imagine out in the future when the drop of hardware pricing makes it near impossible for anyone to make money from hardware. It would seem Google and Microsoft will readily sacrifice their “partners” to remain viable far into the future. I think your question, Ben, is the question the partners have to answer for tomorrow. I hope the smart people of HTC, HP, Asus and so on will ask a question that takes them further out.
Ben wrote, “The long game, however, for Google is one where their services are running on every device and getting there requires the hardware be practically free.”
But I don’t get it. All Google needs is that a sufficiently big majority of users go thru one of their portals, so they can best match up their advertisers with their “date” for the next half hour. They don’t need me to have sixteen different Google-powered devices; they just need me to spend a large enough fraction of my time clicking on ads that they get a good idea of how to make their ads most effective on the various sites I go to.
After all, I can’t buy THAT much more stuff than I already do.
Agreed. If I were a GOOG shareholder (oops, I am) I would be concerned that they are losing focus.
Google is vulnerable to the extent they don’t control the end screen that delivers their service. Think about it:
(a) Google not only provides its Android OS for free but it PAYS SAMSUNG 10% of its ad revenues. Wow, when did that happen? And that reportedly may not be enough! What happens when LG, HTC, Huawei, etc gain market share from Samsung, will they also want some? MFN anyone?
(b) Apple was able overnight to kick Google maps off of iOS and replace it with Apple’s own maps (maligned as it was, but the point here is Apple’s control). Google maps was allowed back, but only after improvements were made that Apple wanted. Even then, some portion of the iOS user base was prob permanently lost to Apple maps. In other words, Apple was able to overnight take some portion of the maps user base from Google and there was nothing Google can do about it.
Same issues for MSFT: Sooner or later it will have to capitulate to Apple and put Office on iOS (30%!!!).
That’s the power of the vertical, down to the end screen.
And MSFT better do that sooner than later, not just bc of lost revenues (est $2.5 bb annually). It it waits too long, the alternatives on iOS may be sufficiently improved as to undermine the Office relevance — seems hard to imagine, but can happen.
Yes, a huge challenge to Microsoft. But *IF* they move to a subscription model — where you can D/L Office gratis, but have to use it in conjunction with a SkyDrive/services setup, Microsoft can become platform-agnostic AND avoid the 30% Apple fee.
I think it’s a reasonable likelihood. A tweep who follows MS pretty carefully, @EdBott, has said that’s what they *will* do. Maybe it’ll actually happen. I’m thinking they want to try to get Win8/Surface rolling a bit better, and then will roll it out.
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