The Big Software Company Hardware PushReading Time: 5 minutes
Recent weeks have been a great reminder that some big companies that once focused almost entirely on software and online services have become incredibly interested in and serious about making hardware. Microsoft, Google, and Facebook have each made major inroads into this space in the last few years, with mixed success, and show signs of getting deeper into the hardware market in the next few months. What has motivated this push into hardware, and where is it likely to lead?
Five Years of Significant Change
Go back just over five years to the beginning of 2012, and three big names in the consumer tech industry – Microsoft, Google, and Facebook – were largely absent from the hardware market. Microsoft made Xbox consoles and PC accessories, but allowed PC OEMs and smartphone vendors to make the hardware that ran its operating systems. Google worked with partners to create its Nexus phones to show off the best of Android but in reality the market was carried by OEMs there too. And Facebook was a social network with no aspirations in hardware at all. Fast forward to today and these companies each now have a significant presence in hardware. How did we get here?
The history is different for each of these companies:
- launched its Surface line of personal computers in October 2012 (the brand had previously been used for tabletop computers), and has launched several more Surface Pros as well as the Surface Book, Laptop, and Studio
- announced its acquisition of Nokia’s devices business in 2013
- unveiled HoloLens in early 2015
- acquired Motorola Mobility in 2012 and owned it for a couple of years before selling much of it on to Lenovo in 2014
- launched the Chromebook Pixel laptop in 2013 and updated it in 2015
- launched the Pixel C tablet in 2015
- partnered with TP-Link and Asus to make OnHub routers in 2015
- unveiled the Pixel phones, Google Home voice speaker, and Google WiFi routers in 2016
- partnered with HTC to create the HTC First, the “Facebook Phone”, in 2013
- acquired Oculus in 2014
- created the Building 8 group and hired Regina Dugan to run the team focused on new hardware projects in 2016.
The pattern, however, is the same: each company has steadily invested more and more in its own hardware over time, and I’ve only covered the history here. Looking forward, Google is expected to launch more Pixel phones, a possible new Chromebook Pixel, a smaller Google Home device, and possibly Google Assistant-powered earbuds later this year, and Facebook has recently been reported to be working on voice speakers, video conferencing hardware, and more. Both Facebook and Google have also consolidated their previously disparate hardware efforts under unified leadership.
Control and New Sources of Revenue the Drivers
What, then, are the drivers of this increased investment in hardware? The simple answer is twofold: these companies want more control over areas they’ve previously had to cede to others, who have often had their own priorities, and there are new revenue streams in providing hardware, which become particularly important as consumers stop paying for traditional software.
Steve Ballmer arguably kicked off the hardware investment era at Microsoft with his Devices and Services strategy, which was a recognition that those two categories and not software sales would be the sources of future revenue for the company, and led to its acquisition of the Nokia devices business and launch of Surface. As other companies – notably Apple and Google – created the expectation that operating systems and productivity software would be free, and funded their own efforts in these areas through device purchases and ad revenue, it became clear that Microsoft’s model would have to shift too.
But both the Surface and Pixel lines can also be seen as attempts to exert greater control over the end user experience than working through OEMs allowed either company. That was born out of frustration over both the lack of competitiveness in the hardware OEMs were creating, largely versus Apple, and also the way the companies’ software features and services were often buried behind layers of user interface and crapware provided by OEMs and their partners. Facebook’s hardware efforts also stem from its frustration at missing out on the last round of user interfaces and platforms, primarily mobile, and again dominated by Apple on the one hand and Google and its OEMs on the other. Investing early in VR was an attempt to stake a claim in what might become the next user interface and ensure a leading role, while the efforts rumored more recently are clearly a response to Amazon’s success in controlling another new user interface category.
These companies have also seen the benefits that accrue to those companies which are able to combine their own hardware and software in a tightly integrated fashion, designing and commissioning their own chips and other components to create highly optimized experiences, with Apple again the prime example of this once-derided strategy. Apple’s AR push with ARKit is just the latest example of how this strategy has allowed it to pull ahead of others by controlling the whole widget from start to finish.
Mixed Success at Best, So Far
For all that, the early efforts from each of these companies have met with mixed success at best so far. Facebook’s phone push with HTC never went anywhere, leaving it entirely without a stake in mobile platforms, while Oculus hasn’t been a huge seller in the VR market and Oculus’s business is still formally immaterial to Facebook’s overall finances.
Google’s hardware has a mixed record too, with the Motorola acquisition a failure, the Pixel laptop and tablets also-rans in their respective markets, and the Pixel phone a modest seller in its first year thanks to limited supply and distribution channels. The Google Home seems to be selling decently well as the only real competition to the Amazon Echo, but it’s far from clear what its long-term business plan is here – advertising seems the obvious revenue model, but is fraught with risk and likely to encounter significant resistance from paying customers.
Microsoft’s Surface is arguably the big success story here, though even then it’s a tiny player in the overall PC market, it took several years of work to figure out the right model for the Surface Pro hardware and software, and it has of course recently seen blowback from last year’s reliability issues. The Nokia acquisition, meanwhile, may have become an inevitability by the time it happened, but certainly hasn’t panned out well either. And HoloLens has an interesting role in the enterprise and education markets, but is far from a mainstream AR or VR product.
Where Do We Go From Here?
It’s clear that we’re going to see more of this stuff from these three companies in the next few months and years, with a launch event from Google this fall a certainty and some kind of new hardware products from Facebook early next year also looking increasingly likely. And yet it’s far from certain how these devices will perform given this patchy history. The categories Facebook is getting into seem like a poor fit either for its expertise or for customers’ perceptions of what Facebook is as a company – I’d argue the push into hardware for ad-based companies is particularly tough, because the products customers know them best for are all free. Thus, they either have to subsidize their hardware efforts with ad revenue or substantially change customers’ perceptions of their brands. The lack of experience with hardware itself can also create problems. To go even further, I’d argue that if we’ve learned anything over the last couple of years about Facebook, it’s that it’s pretty great at squeezing more revenue out of already successful social products, but pretty terrible at creating brand new ones, let alone anything in hardware.
All that said, it’s possible that we’ll see some really good stuff out of these companies too. Microsoft has demonstrated an innovative streak in hardware that’s been refreshing in a market dominated by a lot of me-too products, while the combination of hardware and software in Google’s Pixel was actually pretty compelling too. All of these are companies packed with smart people and impressive capabilities around software, AI and machine learning, and more skills which can be applied to their hardware efforts. In the process of pursuing these hardware ambitions, these companies have also pushed competitors and partners to do better, and that’s particularly clear in the PC business, where the Surface has arguably shaken some life into the OEMs.
Overall, there’s still quite a bit of uncertainty over the exact direction the hardware pushes at these erstwhile software companies will take over the coming years, and how well it will work out for them. But it’s abundantly clear that each is now very serious about hardware and going to spend a lot of money in the coming years trying to figure that out.