Monday, June 25, 2012

Microsoft Surface: What's the Strategy?

Microsoft's decision to build its own tablet computer (called Surface) has raised some interesting questions about the firm's strategic intent.   Has the firm finally acknowledged that Steve Jobs was correct when he said that you had to be vertically integrated to produce something as terrific as the iPad?  In other words, did the same firm have to make the hardware and the software, because complex integration was needed to deliver a exceptional customer experience?   Jobs, of course, believed that Android devices could not match the iPad experience because they lacked such sophisticated integration (since the hardware makers were simply licensing the Android system). 

A recent New York Times story suggests an alternative hypothesis:  Has Microsoft decided to move temporarily into the tablet hardware business so as to drive the type of innovation that could lead to lucrative tablet operating system and software sales down the road?   Toward the end this New York Times article, MIT Professor Michael Cusumano offers his take on Microsoft's latest move.  Here is the excerpt from the article:

Some who study the technology industry still believe Microsoft will get out of the business of selling its own tablet computer as soon as it can persuade other hardware companies to build compelling devices of their own. “I think once they jump-start it, they plan to make money the way they always have — from licensing software,” said Michael A. Cusumano, a management professor at M.I.T. 

I found this hypothesis quite intriguing.  I can think of at least one other example of a company choosing to vertically integrate on a "temporary" basis.   Coke and Pepsi both chose to forward integrate into bottling and distribution some years ago, and then they divested those units.  Why the back-and-forth?  Some (including HBS Prof. David Yoffie) would argue that Coke and Pepsi forward integrated  so that they could acquire and consolidate their distribution network, driving economies of scale throughout the channel.  They also wanted control of the channel at times as their product strategies shifted.   However, the firms didn't want to have all those assets on their books for the long haul, given the returns in bottling and distribution are much lower than in concentrate production.   Of course, both chose to forward integrate once again more recently, and now we hear rumblings (particularly at Pepsi) of the possibility of another divestiture down the road.  Again, forward integration may have served a distinct strategic purpose, but the firms may find themselves questioning the returns on the distribution businesses. 

Similarly, Microsoft may not want to be in the hardware business long term, as the returns are likely to be lower than in the software business (at least if the tablet market operates in a manner consistent with returns in the personal computer market).   However, "temporary" vertical integration may be their way of shaping the industry in the way that will be positive for them in the long term.   We'll see which hypothesis turns out to be correct.  It should be fascinating, and of course, it will depend on how well customers receive the Surface product. 


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Unknown said...

I'm thinking there is another layer of strategy at play here as well. If you look at the smartphone market over the past few years, the winners (like Apple) recognized that the game was really about the ecosystem surrounding the phone, such as apps, music, books, and other forms of digital content available on the platform. The losers (like Nokia) didn't recognize this and lost some serious ground.

This cellphone ecosystem is easily convertible to tablet devices, and my guess is that Microsoft also believes that this ecosystem will eventually grow to include their foothold in desktop computing. With digital convergence accelerating, Microsoft likely believes that they need to become a major player in this game (and the emphasis on the Metro theme in Windows 8 highlights this). In order to build a robust ecosystem for the future, it is imperative that Microsoft work to bridge the gap between their personal computing and smartphone offerings to create a unified platform. A tablet seems to be a logical extension of this strategy.

Casey Madison said...

Lets face the ipad is a huge Iphone , it is a tremendous, fantastic toy. But for serious business use it is simply of little to no use at all.
If I can use this for business and it doubles as an entertainment device - there is absolutely no reason in the world I would buy another IPAD.

Casey Madison said...
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