Microsoft Sees Apple has Been Right All Along

For the majority of Microsoft’s existence, they have been an OS company that provides key software that ran on PCs. Then, in the mid-1980s, they became a software applications company and dabbled in things like mice and keyboards as well. While they got into hardware with the XBox, this product was a vertical play for gamers and had no impact on their core businesses and PC partners. During that, period I was very close to Microsoft. In fact, often Steve Ballmer and I would meet or have lunch when he came down to Silicon Valley to discuss Microsoft’s visions and strategies and he would try and convince me Microsoft was on track to dominate the PC world well into the future.

But on at least two occasions, I suggested to him ultimately Apple had the better business model in that they controlled the hardware and software and also oversaw its user interface so the hardware could be tweaked to the UI. I suggested this type of oversight would help Apple in the long run and give them greater control of their destiny. At the time, Ballmer could not see this as a plus for Apple and banished the idea they would ever want to own or control the entire ecosystem in order to guarantee Microsoft’s future. They relied too heavily on their PC partners to help get Windows to a broad market and, to be fair, during that time period he was right.

However, what concerned me even then was that, as early as 1988, we started to see consolidation in the PC market. Because an IBM PC clone could be made with basic parts taken off the shelf, companies around the world were coming out of the woodwork to create PCs and sell them in local markets. Most of these became what we call “White Box” vendors, but NCR, DEC, Panasonic, Toshiba, Acer, Samsung, Great Wall in China and about 2 dozen other branded vendors jumped in to what was a lucrative market but one that became highly competitive. By the early 1990s, we started to see the first wave of consolidation and well over a dozen companies dropped out of the PC market altogether. That consolidation continues today an,d with each wave of mergers, Microsoft’s partner and distributor pool of Windows decreases.

Microsoft is a smart company and I think they saw the consolidation writing on the wall pick up steam at least 4-5 years ago. Secretly in their labs, they began to create prototypes of various kinds of hardware for two key reasons. One was to try and influence designs they wanted their partners to bring to market such as the 2-in-1 Surface, but the second was even more strategic. Market consolidation is a huge threat to Microsoft and, by creating their own PC hardware, they were building an insurance policy for the future that guarantees that, even if more consolidation takes place, they could become a serious vendor in their own right. This would guarantee there would always be a solid hardware vendor carrying the Windows OS forward should consolidation impact their current partners and reduce the number of vendors who would sell Windows PCs.

The original 2-in-1 Surface was not a threat to their PC partners since it had an ARM processor and would not run Windows applications and their partners were OK with this. But with Microsoft’s new Surface Pro 3 and 4 and their new Surface Book, they are now direct competitors to their partners, something Ballmer told me back then Microsoft would never do. Of course, Ballmer’s gone and any strategy he had in the past has been trumped by Microsoft’s new leadership who are much more realistic than Ballmer ever was about Windows future.

But if you look at Microsoft’s new strategy, one can’t help but see this is an acknowledgment Apple’s business model of owning the hardware, software and services is ultimately the best one that assures Microsoft’s control of their destiny. At the moment, it looks like Microsoft will only have three serious PC partners — HP, Dell, and Lenovo — doing any volume. Some are asking how long even these vendors will continue to support PCs given shrinking margins.

It is no secret this move into hardware has angered their current PC partners. While not necessarily seen as a betrayal, they would have preferred Microsoft not get into hardware and put more of their design and software UI resources into their partnerships instead of creating their own hardware and tailoring it for their own devices. However, Microsoft ultimately has no control on how successful Dell, HP or Lenovo will be or even if they will continue to support Windows in PCs, given the volatile state of the market and the level of consolidation that continues today.

What Microsoft has had to conclude is that, in the end, the idea of owning the hardware, software and services is the only way to control their destiny. At this time in their history, they had to make this difficult decision even if it brought them into conflict with their PC partner relationships. It looks like “the Apple Way” is now the Microsoft Way too.