Pixel and Surface: Comparing Google and Microsoft’s Hardware Game Plans

on October 14, 2016

Google’s recent launch of the high-end Pixel and Pixel XL smartphones marks the company’s first self-branded entrance into the market, after dabbling via partner-branded Nexus products and a short run as the corporate owner of Motorola. Like Microsoft in 2012 and Apple decades before that, the company clearly understands that, to drive the best possible premium customer experience, it must own not just the software and services on the device but the device hardware itself. It’s instructive to compare Google’s plans for Pixel with what Microsoft has done with Surface and how both have modeled elements of their strategy on Apple.

Let’s start with a short history of Microsoft’s Surface. Microsoft launched the first two versions of the Surface, called the Surface and Surface with Windows RT in 2012, at the same time as it rolled out the ill-fated Windows 8 operating system. The product line suffered a rocky start as the company struggled to define its two different products, which resulted in a $990M loss. Undaunted, in late 2013, Microsoft launched the Surface 2 (the last product based upon Window RT) and Surface Pro 2 (Windows 8) and started to sharpen the products’ focus.

The Surface Pro 3 launched in 2014 to better reviews and improving sales. In 2015, Microsoft launched Windows 10, a demonstrably better operating system, which also helped Surface. Later that year, the company launched Surface 3, a lower-priced Windows 10 product, followed by Surface Pro 4 and the new, even pricier Surface Book. Microsoft will hold an event in late October where the company is expected to launch additional Surface-branded products.

Market Maturity
A fundamental difference between Pixel and Surface has to do with the maturity level of the market the device is entering. While Microsoft certainly didn’t invent what we now call the detachable market, it certainly put it on the map. Frustrated with its partners for not moving faster to embrace the form factor, Microsoft launched the first Surface into a market with total shipments in 2012 of 4.6M units. After a slow start, Microsoft moved into the number one spot, largely maintaining that position until Apple arrived with the iPad Pro. In 2015, the detachable market reached 16.6M units. It will double in size in 2016 and we’re forecasting strong growth for the next few years. Detachables is a high-growth area but, from a volume perspective, it’s quite small versus relevant adjacent categories.

Contrast this with the smartphone market, with massive shipment volumes but slowing growth. In 2014, the worldwide market saw growth of 10.4% year over year, with worldwide shipments of 1.4B units. In 2016, growth will slow to 1.6%. Moreover, much of the market’s growth is happening in the low-end of the market, primarily in emerging markets. There is still clearly a market for premium products, including high-end Android but, as a percentage of the market, that high-end space is shrinking and Apple and Samsung have a strong grip on many of these customers.

Obviously, Samsung’s current Note 7 recall woes present a golden opportunity for the Pixel in the premium space. However, it is unlikely Google is prepared to take advantage of that opportunity because its phone simply isn’t going to be available in all the channels where people traditionally obtain their smartphones. For example, in the United States, the only telco to offer the product is Verizon (although the Pixel will work on other networks). Best Buy will also carry the phone and, of course, you can buy it from Google’s online store. Google must be willing to expand the Pixel’s availability if it hopes to move the needle with this product. The company’s long-standing reluctance to embrace a wider channel strategy must evolve. This was one of the key elements of the Surface’s eventual success. In fact, in 2015 Microsoft went so far as to embrace Dell as a reseller of Surface hardware, bundled in a Dell-owned service contract. Apple has similarly embraced an ever-widening channel approach, especially when it comes to commercial buyers with high-profile deals with IBM, Cisco, and Deloitte.

The Partner Tightrope
One of the reasons Google is likely limiting the initial channels for Pixel is that, like Microsoft, it is walking a tightrope with a long list of hardware partners who use its operating system on their products. By targeting the high end, both companies argue they effectively limited their total available market, which gives them each cover with their partners. And it’s worth noting that, even when Microsoft has offered slightly lower priced (but still high end) Surface products, they haven’t done particularly well. While Microsoft isn’t rushing to put out less expensive products, it has certainly expanded its high-end product line with the Surface Book and I expect it to further expand later this month. I would expect Google to do the same over time. So, while both companies try to placate their partners, those partners should be wary just the same.

Customer Service
One of the key elements Microsoft copied from Apple and that differs for Google, is the vendor store. Apple Stores are not only a place to buy Apple hardware but a place to go if a customer needs some face-to-face help with their device. Microsoft’s rapid expansion of its stores allowed it to offer a similar level of hands-on customer service for Surface. Google doesn’t have physical stores of its own, so it is taking a different approach by offering 24/7 customer service through the phone. In either call or chat form, a human can help with issues and you can even share your screen. It’s worth noting Google isn’t the first to do this, as Amazon has offered this service on its tablets in the past. This is clearly not the same as being able to talk to someone in person but, for many people, this may prove to be a more preferred method.

The Long Game
The debate I’m having with my industry colleagues is about Google’s long game in hardware. Is the company simply trying to urge its partners to bring better devices to market or does it plan to own a chunk of the market? Microsoft argued it was doing the former with Surface but certainly didn’t bow out when partners such as HP, Lenovo, and Dell brought higher quality detachables to market. Whatever Google has planned, there’s no doubt the Android market is better with it in the mix. It will be interesting to see how the company’s products fare and how its partners respond in the coming months.