Mobility

The two reasons why software companies are making hardware

James Sanders examines the recent hardware strategies of Microsoft and Google, and identifies the real winner in this changing IT landscape.

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Microsoft Surface Pro 4
Image: Sarah Tew/CNET

Two years ago, I wrote an article titled "Acer and Microsoft: A tale of mutual decline." At that time, the PC OEM market was rather shaky — response to Windows 8 was so poor that even Microsoft evangelist Paul Thurrott characterized it as "a disaster in every sense of the word." Consumers and enterprise simply were not buying in, leading to poor sales of Windows licenses and devices that come with Windows preloaded.

Since then, the PC market has become worse — sales have been down for 14 consecutive quarters, and the results for Q3 2015 show that sales are down 10.8%, compared to Q3 2014, with Acer seeing a 25.9% decline in the same timeframe, according to IDG. In August 2015, the CEO of Acer said any potential buyer of the company would get an "empty shell." Android OEMs are also struggling, with HTC — the first company to ship an Android phone — is reporting losses.

With the ailing hardware market, why are Microsoft and Google designing and selling hardware? Before answering that question, let's consider some of their recent strategies.

Microsoft's Surface strategy

The Surface Book — effectively the first notebook PC offered by Microsoft — was a surprise when it was unveiled on October 6, 2015. It has a variety of features that few products from PC OEMs have — the keyboard houses an optional discrete GPU, the "dynamic fulcrum hinge," which does not let the screen and keyboard close flush against each other, and it features a 3:2 HiDPI screen similar to the one found on Google's Chromebook Pixel, in a market where Apple computers feature 16:10 screens, and PC OEMs provide predominately 16:9 panels.

The value proposition is difference — PC OEMs are too risk averse to attempt experimental devices like these — though risk aversion is not without good reason. The Surface line of products resulted in losses of $1.7 billion for Microsoft from launch to the end of FY2014. Sales have picked up over the last year, though on the mobile front, Microsoft suffered a $7.5 billion writedown over the Nokia purchase.

Some PC OEMs are displeased with Microsoft's foray into hardware — former Acer CEO JT Wang told Microsoft to "think twice," and Lenovo president Gianfranco Lanci flatly refused to resell the Surface at Lenovo. Dell and HP resell and support the device for enterprise customers.

Google's Nexus and Pixel strategies

Since 2010, Google has partnered with OEMs to produce phones and tablets running Android, with the software updates provided directly by Google as new versions are released. Because of this, Nexus phones have a reputation for better security, which is an increasingly large concern in the shadow of Stagefright. Nexus phones lack the vendor-specific apps, user interface, and carrier bloatware that typically accompany Android phones marketed by carriers, though they generally retain the design language of the OEMs that produce them; for instance, the newly-introduced Nexus 6P, produced by Huawei, bears a great deal of resemblance to the Honor 7i.

The Pixel series is a different project. Google's brand of Chromebooks, and now tablets, are not developed in collaboration with OEMs. The Pixel series uses premium components (relative to other Chromebooks and Android tablets), and are accordingly priced substantially higher than other products. Pixel devices are not available outside of the Google Store, and do not appear to be sold in particularly high volumes — this is not Google attempting to make a serious play on device manufacturer territory.

So, why are these software companies making hardware?

There are two main reasons for software companies like Microsoft and Google: the first is to build reference platforms for OEMs, and the second reason is cloud services — or, alternatively, the ecosystem as a whole.

Building reference platforms for OEMs

The first Nexus phones to feature fingerprint sensors ship with Android 6.0, which is the first version with a fingerprint API. Both the Surface Book and Pixel products have nonstandard screen ratios, which is an increasing trend among developers, as 16:9 proves inadequate for productivity. These reference platforms are not intended to overtake OEMs — they lack features for specific use cases, such as microSD support on Nexus products, or country-specific features like 1seg broadcast television or Osaifu-Keitai mobile payment system used in Japan for the last 10 years.

Cloud services

Microsoft and its OEM partners have been struggling to revive interest in Windows computers, resorting to a cringe-worthy "PC Does What?" ad campaign. While goodwill toward Windows 10 is certainly better than Windows 8, Microsoft has a long way to go before acceptance is at the rate of Windows 7, particularly in light of controversy surrounding privacy settings.

Overall, Microsoft uses Windows as a platform to upsell end users and IT shops on other products, like OneDrive storage and Office 365, among others. Google pushes Drive integration with the Chromebook Pixel as well — users can get 1 TB of storage free for three years (normally $360) with purchase.

The real winner is...

It is important to remember that the actual manufacturing of these devices ultimately winds up in a relatively familiar place: original design manufacturers (ODMs). Products sold by name brand OEMs like Dell, HP, Lenovo, and boutique brands like System76 are ultimately produced by a group of predominantly Taiwanese ODMs such as Compal, Quanta, Clevo, and Pegatron, the latter being the contract manufacturer of Microsoft's Surface products. Though they may come from essentially identical origins, the original designs of Microsoft and Google do significantly stand out from the rebadged products sold by OEMs.

Your purchasing criteria

When purchasing a computer, or for corporate fleet purchases, what are your criteria for purchase? Do you favor one OEM over another? Share your purchasing pointers in the comments.

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About James Sanders

James Sanders is a Java programmer specializing in software as a service and thin client design, and virtualizing legacy programs for modern hardware.

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