After years of being known as a PC software company, Microsoft has entered the mainstream computing market with its Surface tablet. It's a bold decision to compete with its current customers and this move is very controversial; in fact, many of those who have backed Microsoft over the years contend that the Surface is a mistake.
Whether or not the Surface is a mistake for Microsoft is an interesting question and one that I have been pondering for quite a while. At the strategic level, I believe Microsoft officials watched Apple very closely and came to the realisation that much of Apple's success has come because it controls its hardware, software, and services. Amazon also owes its great success with tablets to the fact that it owns an entire ecosystem.
Sitting back and watching Apple assume a dominant position in the smartphone and tablet markets must have irked Microsoft a great deal. Remember, it was Bill Gates who pushed tablets as early as 1992 and stated more than a decade ago that tablets would be "the future of mobile computing." Microsoft also got into the smartphone business years before Apple did.
However, Microsoft's move into the hardware business with Surface is a double-edged sword. It clearly allows the company to gain a bit more control of its ecosystem by being able to innovate around a tablet design, but it also alienates its partners since it now directly competes with them.
Microsoft, in reality, has been in the hardware business for some time, with for example the Xbox. Still, getting into gaming hardware is quite different to getting into the tablet and potentially the smartphone hardware business. In the case of the Xbox, it had no existing hardware partners; with tablets and smartphones, it has a multitude of licensees and partners that take various versions of Windows 8 or Windows Phone 8 and use it on their devices.
I have spoken to many of Microsoft's partners and they are understandably unhappy about its entry into the mobile hardware business. Actually, unhappy is an understatement. When I speak with them about this issue, they get very animated and, in many cases, they have told me that they no longer trust Microsoft.
I can't emphasise enough how big a problem this is for the company. Hardware with Intel chips and Microsoft operating systems, which were licensed to partners, dominated the entire WinTel era. Neither Microsoft nor Intel dared to compete by making hardware in order to guarantee that their own products got to the market in as many ways possible.
But now, Microsoft has betrayed its partners. For decades, they were the ones who tirelessly pushed Microsoft's products through their PCs and, until recently, that model worked just fine. And while partners declare their anger towards Microsoft, they also know they have to walk a fine line. When it comes to delivering PCs for business, SMB, and consumers, they still need Microsoft's Windows OS given the market demand. Because Microsoft has committed $1 billion (£620 million) to advertise Windows 8 and Windows Phone, they all want to get some of the co-marketing cash that goes along with being a partner in this current Windows launch.
If the decision to enter the tablet hardware business was based on the desire to have more control of its ecosystem à la Apple, Amazon, and even Google, I can at least understand the calculated risk. Even so, I suspect that it is too late to do this without further alienating its partners, as the collateral damage done to its ODM and OEM relationships has really hurt its long-term credibility with these vendors.
Personally, I believe the company should abandon its quest to be in the hardware business with any products that compete directly with its customers. If not, I wouldn't be surprised if its customers will be lukewarm in supporting Microsoft's software in the future and use it only in markets where they see demand. Instead, they could become more aggressive in backing Google's Android OS in mobile devices, and even start to ramp up stronger support for Google's Chrome for use in future Chromebooks, especially in consumer markets where the price of laptops is a big issue.
It will be very interesting to see how Microsoft navigates these waters over the next year. Its approach to the situation will determine whether the company can grow or whether it will fracture its relationships with OEMs even more.
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