Why Microsoft is Getting into Hardware

on October 9, 2015

When I started at Creative Strategies in 1981, the PC industry was in its infancy. In fact, my first consulting project was with the IBM team led by Don Estridge and Bill Lowe, the two men who brought the IBM PC to market. I have seen the PC industry ebb and flow and, over those 34 years, have witnessed consistent consolidation in the industry. At one point, there were over 30 mainstream PC brands around the world. Today, there are basically four top tier brands — Apple, Dell, HP and Lenovo — and another lesser tier that, at least at this time, includes companies like Toshiba, Acer and Asus. Then there are white box PC vendors that meet different needs in different markets.

But with the PC industry contracting and selling only about 280-300 million PCs a year and showing no growth, only the big players will probably have the staying power to keep their PC business alive. Companies like Toshiba, Acer and Asus could have trouble competing against the big guys as they see their margins shrink and their own bottom lines strain. They could be forced to scale down their PC business altogether over the next 2-3 years. If this happens, it will be a issue for Microsoft as their OEM customer base would also shrink.

But there is another problem, especially for Microsoft. DDell and Lenovo are mainly focusing on enterprise and SMB, although Lenovo does have a healthy consumer business in China and Europe. At this time, HP still has a solid PC business targeting enterprise and consumers, even though the move to split the company has many concerned about the long-term viability of HP’s PC business. It is too early to tell how successful this split will be but, should HP flounder in their PC business, that could have a major impact on Microsoft — HP may not be able to deliver the volume shipments of PCs that would help drive their Windows franchise to a broader consumer audience. Add this to the fact Apple is getting more aggressive with their own Mac and iOS tablet business and are challenging Microsoft’s Windows OS with enterprise and consumers. With the iPad Pro, Apple could bring even more business users to their platform given the rich ecosystem of apps available, especially for the iPad.

Originally, Microsoft’s Surface and Surface Pro were designed to help drive the 2-in-1 concept and get their hardware partners to follow suit. But the Surface business is now a $6.7 billion dollar one and no longer can be looked at as just a prototype business. The good news for Microsoft is their partners have created 2-in-1s and, with Apple introducing the iPad Pro, Apple basically blessed this category of devices and 2-in-1s are on track to be big sellers, especially to business users. Even Microsoft’s new Surface Book is designed to push their partners to create more innovative and sleek designs. That is why they priced their version at $1499, knowing full well it will spur partners to replicate the design and come in at prices much lower than theirs. I actually think the Surface Book is such a great laptop it too will be a big money maker for Microsoft even when the OEMs release similar models.

But, in the end, what Microsoft is doing is learning how to create great hardware, which will serve as a potential back up strategy for them should more of their OEM partners flounder, with the possibility some might even abandon the consumer PC markets, given their low margins and expensive channel support. This move to hardware is very strategic for Microsoft. Although marquis products drove this initial strategy in order to make sure their partners innovated around new form factors, they now are on to more of a defensive position. This is being done in order to guarantee there will continue to be great and innovative hardware to support Windows, especially for the consumer market, so they can be ready to pick up the slack should they loose hardware partners who support their platform in the future.