Microsoft’s Uncharted Territory

on October 18, 2013

As I study the industry, the market trends, and the solutions trying to flow with the trends, I’m fascinated by what Microsoft is doing strategically. From a historical standpoint, we have to conclude that the Microsoft of old is drastically different from the Microsoft of new. The recipe that got Microsoft to where their once dominant stance in the market has been is not the recipe that will again make them relevant. ((Note I didn’t say dominant, as I have a hard time making the case that any company will truly dominate the market the way Microsoft once did.))

We are seeing this shift in action as Microsoft gets more active in the hardware space with products like Surface and their acquisition of Nokia. We are watching Microsoft abandon nearly all the strategies that made them successful and embracing new ones in the hope of a future. A quick survey of the hardware landscape brings this to light.

Hardware Walled Gardens

What we are seeing is the emergence of hardware walled gardens. Take Surface for example. The Surface–and even more so with Surface 2– was designed with an experience that is based on proprietary hardware accessories. Many of the new accessories and keyboards work only with the proprietary port designed into the Surface’s hardware.

What is interesting about this is that it is somewhat counter to how the industry rallied around Windows to begin with. Microsoft’s success up to this point was built up around the idea of compatible hardware and accessories around the Microsoft ecosystem. A customer knew that if they purchased a desktop or notebook from a Windows vendor that many, if not all of their ports, were compatible with third party accessories. We may be moving away from this model. The only exception was in docking stations. Third party vendors often made their connectors to the laptop proprietary but all other ports were based on industry standards.

A quick glance at nearly every other hardware partner of Microsoft’s and we see the same picture emerging. Nearly all of them are building hardware specifically tied to proprietary ports using proprietary accessories for a specific value proposition. So what has changed that is causing this shift? The answer is differentiation.

During the era of compatible hardware there was nowhere near the need to differentiate as there is today in the broad consumer landscape. When most PC users were being supplied with computers from their employer, it was their employer who made the buying decision and did so in bulk largely based on price. Once a pure consumer market emerged–somewhere in the mid 2000s–we saw a more clear demand from consumers to differentiate and hardware companies were forced to think of new differentiation strategies in order to compete.

This is in essence the challenge of a hardware company who ships the same software as their competitors. Hardware becomes the only real differentiation point and maintaining more loyal hardware customers becomes even more challenging. ??So enters the era of hardware walled gardens. Companies like Microsoft, Dell, Acer, Lenovo, Samsung, Sony, HP, etc., hope to generate more hardware loyal customers by locking them into a proprietary hardware ecosystem. This is out of necessity because they simply can’t do so with a proprietary software ecosystem like Apple can.

Glimmers of Hope

I don’t necessarily think this is a bad thing. I simply believe that it is different from what we have seen historically from Microsoft and its partners.

This trend certainly lines up with the BYOD stance of many corporations today. Consumers may choose the best hardware ecosystem to meet their needs at both home and work. But based on the understanding of differentiation I outlined above, it is fascinating to think that PC companies may be evolving into accessory companies. What I mean by that is that their “box” strategy is really more a means of an end to their accessory strategy where the real money may be.

Now, if we use this line of thinking then the Surface makes perfect sense. While Microsoft has never had a true PC hardware business they have had an accessories business for quite some time. So perhaps the Surface is more an accessories strategy than a box strategy. Whether it is or not, Microsoft’s partners will follow suit. ((Of course, it will be also interesting to see how Microsoft navigates the hardware waters at large. I’ve been of the idea they should license technology like Surface’s connectors, etc., to partners. However, Microsoft seems committed to some degree of hardware.))

We are at the very beginning of this shift. I’ve continued to think that hardware companies will be continually challenged if all they are is hardware companies using off the shelf operating systems. However, by adding a proprietary hardware walled garden angle into the mix things can get even more interesting and actually be a profitable part of their business. Perhaps hardware companies who think about their hardware walled garden may not only continue to differentiate but also may be able to layer web or tie software services onto that differentiation.

We are very early in this hardware walled garden trend and the next 12 months will be very interesting to watch how this new approach to differentiation of Microsoft and their partner ecosystems develop.