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.