A Mouse and Keyboard Don’t Make a Hardware Company

Microsoft is not, and never will be, a hardware company. Please don’t go off saying “what about Xbox or mice & keyboards?”

Microsoft does not really want to build & sell hardware. Surface is akin to Google’s Nexus; a ‘north star’ product intended to lead OEMs in the right direction.

“With Surface we wanted to make sure that no stone is left unturned, in terms of really showing Windows 8 in its most innovative form. With Windows 8 you can get a tablet and a PC in a single package, and I think Surface probably proves that as well as anything. Our goal is not to compete with hardware partners. The bulk of our Windows volume is going to come from our hardware partners.”  – Steve Ballmer, Forbes, July 18, 2012

I repeat: Microsoft is not, and never will be, a hardware company.

First, Xbox, while finally turning a profit, is a shining example of how far Microsoft needs to go to truly be excellent at hardware supply chain management. The RROD debacle cost MS many billions of dollars and I don’t think they’ve learned their lesson.

I know some of the people who drove the Xbox360 hardware design and supply chain management. They are now war scarred and seasoned experts. They are the type of people you want working on the next big thing. None of them even knew about Surface until it was announced. Typical Microsoft organizational silos. (New info shows my sources may or may not have been correct. Removed this because I’d rather debate the core issue.)

Designing and building hardware is easy. That is, easy relative to SELLING hardware. Retail, hardware supply chain management, inventory management, support, etc… are huge endeavors that Microsoft has very little capability for. If you have not actually tried to build and sell a hardware product you cannot really understand just how challenging it is. The DNA of Microsoft is that of a software company. Zune proved this. The ZuneHD was (and is) a fantastic piece of integrated hardware & software. But Microsoft’s execution in selling it was bush league.

Second, a tiny, tiny percentage of Microsoft’s profits come from direct sales of products to consumers. Like less than 5%. In order for MS to seriously get into the hardware business it would need a model that enabled something close to the +40% gross profit margins Apple is seeing from its vertically oriented model. It would take a decade or more of radical change for Microsoft to make such a change, and while MS has demonstrated it can turn the ship (more like a fleet) before, I simply do not think this is a direction it can go.

I do not believe Microsoft will try to compete with Apple on Apple’s terms (vertically integrated, high-margin hardware with up-front payment and a walled garden). I believe Microsoft will try to end-around Apple by continuing with a predominantly horizontal play, enabling annuity revenue streams from connected experiencesdelivered across all of a user’s devices, regardless of whether they run Windows or not (including Apple’s devices).

We will see more hardware from Microsoft. I still wouldn’t be surprised to see a Microsoft designed & built Windows Phone 8 device this fall. There will be new generations of Xbox hardware too. And mice & keyboards. But these things are but grains of rice in a grain silo.


  1. Rohit says:

    “Microsoft will try to end-around Apple ”
    I think we are seeing this with Office, if it is offered as subscription on any device. Long term I will not be surprised if Windows unit sale drops but profit from Office negates it. It looks like Office is going to be more important that Windows in future.
    And lets see what services they offer under xBox.

  2. Jeff Kibuule says:

    I don’t think revenue will come from building hardware, but they can no longer hope that OEMs will pick up the slack while they make money off of Windows licenses. The iPad has completely changed that world. And they have to look at the fact that 1.3 billion PCs in the world literally means than at LEAST 5.7 billion people have no allegiance to their software, and the iPad at $399 is a far more captive machine in the 3rd world than your average PC.

    1. I’m not sure we’re disagreeing Jeff. 

      The key point to recognize is where AAPL generates it’s profit from that $399 iPad. They get ~40% gross margin UP FRONT, when the customer buys it.  They can do this because they are so vertically oriented.  Hardware, software, manufacturing, supply-chain, inventory management, retail space, retail staff, support, warranty, etc…. 

      My assertion is that Microsoft is not built to replicate this model. It’s DNA, as a software company, will not allow the transformation that would be required to get even 10-20% gross margin UP FRONT when the customer buys a $399 Surface.  Instead Microsoft will attempt to get that type of margin from a POST SALE, annuity from services (Experiences) delivered across ALL devices the user owns (regardless of whether that device is running Windows or not).

      1. wonderyak says:

        A Subscription Office Suite on each and every one of those walled in iPads. Thats just as good.

        1. Walt French says:

          Microsoft’s Outlook and Office 365 movements are great advances… against the Google of 2010.

          They won’t be so attractive for the person with a 3G connection or the iffy wifi that you can (sometimes) get on a plane.

          They’re hardly the end-all, be-all. Maybe in a few years the tech will allow them to thrive. For now, I’ll keep all my spreadsheets on my laptop, thanks.

        2. Eponymous Coward says:

          If only Microsoft had a unit with a bunch of hard-core, long time Apple programmers who’ve spent decades shipping for that platform. Maybe they could call it the “Macintosh Business Unit”.

          Oh, wait, they do. But they’ve been strangely silent (or just concentrating on defending the Office legacy app sales with their tiny division- it’s like 5% of the size of WinOffice). Maybe they’ve been re-org’ed again into some other different tiny backwater? Pity.

          1. You mean the team that insists on building every damn UI element of their apps from their own code, rather than using Apple’s code, so that nothing on in Word or Excel ever actually works like a Mac should, and it constantly lags two years behind any other app in the features it supports?

            And that, even though part of MS, can’t ever get their apps to support any unusual parts of the Word file format, like foreign languages or equations?

            Yeah, I’m not sure MS has anything useful to learn from these people. They’d do better hiring fifty random OSX shareware developers.

      2. guest says:

         None of these points address a more fundamental issue in my mind. Namely, MSFT (and Intel) have bled all the profits out of the PC industry, much like Coke & Pepsi did selling high-margin syrup to the bottling industry. End-result:  Coke and Pepsi both had to re-invest their own capital into the bottling industry. The OEM PC industry is dysfunctional at its core, MSFT may find itself in the hardware business out of necessity, just as Coke had to re-enter the bottling business, even tho’ it did not consider that to be its “core competency”…

        1. Walt French says:

          Microsoft didn’t so much bleed all the profits as the manufacturers brought essentially nothing uniquely valuable to the table.

          Econ 101 says that when there’s robust competition (e.g., feed grains), each producer gets enough (on average) to cover costs and a tiny profit. There’s just not enough differentiation between cheapo desktops to be any different from that.

          I note that it’s not Apple’s integrated hardware+software that makes them the megabucks, it’s their producing products that nobody else quite competes with: you go to Apple or get a substantially lesser product. If you want a reliable, good-performing, well-supported tablet with lots of good-looking and robust apps today, it’s Apple or nobody.

          As Charlie emphasizes, it’s not just the hardware: it’s the whole thang that consumers want.

          1. Guest says:

            Possibly two sides of the same coin(?) Everyone likes to point out that the value is really in the software, but consumers don’t buy software, they buy solutions to getting “work” done (“work” used generically here). My thesis is that MSFT’s OEM PC licensing model has left the overall ecosystem unbalanced, and potentially harmful to MSFT’s future if the OEM manufacturers are rendered economically unviable.

          2. Walt French says:

            Apple has engineered value into both the hardware AND software. They’re somewhat inseparable so it’s not entirely possible to price them individually, but I’d say most of the value-add is in software. Look at the Nexus7, a pretty sweet piece of hardware, easily competitive with the iPad. But a pretty modest set of apps available to people who like Chinese dictionaries, quilting guides, expense-reporting packages or any of a zillion other niche apps that everybody wants one of.

      3. orthorim says:

        I am as much in awe of Apple’s hardware margins as anyone – and Tim Cook is CEO because he’s responsible for that.

        But Apple’s margins on the iPad are a lot smaller than iPhone and Mac. iPhone are the highest – probably because they can, and because it was supply constrained for the longest time, and the iPhone 5 will yet again be supply constrained. So for the record, iPad margins are not 40%.

        1. Jon T says:

          iPad margins are indeed considerably lower – because Apple has chosen to choke off any and all competition before it even gets started. There are no phone operators to equalise the marketplace with the iPad – Apple will own it – as they did (do) with the iPod market.

          1. orthorim says:

            Yeah, couldn’t agree more – Apple’s margins on the iPad are low by choice. They’re going for market share.

  3. Guest says:

    Just reading the title made me feel that, this is something about RAZER or SteelSeries. 😛

  4. TerrierJack says:

    Having bought a Zune, I will never buy another piece of Microsoft hardware. If they sell gold-plated tablets for 39 cents I will tell everyone I know to avoid them like the plague. They suck at hardware the same way IBM sucks at software.

    1. mm71 says:

      I would love to buy a few gold-plated tablets for 39 cents.

      1. Insert ob Mitt Romney joke here…

    2. anonavirtue says:

      I guess they suck about as hard as Toshiba then (the Zune v1 ODM)

    3. The Zune really is a bad device, however I think the Surface can be a great product. If Microsoft would make a bad Surface, then Windows 8 on tablets won’t really succeed, because as said: 
      “With Surface we wanted to make sure that no stone is left unturned, in terms of really showing Windows 8 in its most innovative form.” 

    4. teamdave™ says:

      i take it you never got a zune hd then? i havnt seen a nicer mp3 player yet to be honest. its just a shame they released in one country only

  5. Guest says:

    So you’re saying that even if Microsoft designs and builds its own Windows Phone 8 cellphone, a Windows 8 tablet, a Windows RT tablet, Xbox 360, and a gazillion different mice and keyboards, they still won’t be a hardware company.

    What WOULD make them a hardware company??

    1. A capex structure primarily based on manufacturing, supply chain management, and distribution of physical goods. 

      Look, for example, at the capex structure of a company like Samsung (or Apple). 

      Microsoft’s capex structure is based on intellectual property creation, sales and marketing.

      1. wonderyak says:

        MS’s real meat is on the enterprise.

        1. orthorim says:

          I didn’t actually know that Microsoft’s direct to consumer sales are in the single percent digits of the total.

          That is scary for MS’ long term survival. “The Enterprise” is currently locked in tight with MS, it’s not going anywhere. But I think the day will come that they’ll wake up and realize what all the small companies already know – that 3rd party stacks of office software is both cheaper and much, much better than Microsoft’s third-rate products. 

    2. orthorim says:

      Announcing a product doesn’t make them a hardware company. The surface is pure vaporware, without release date or price. What if they release it 2014 for $3,000? Would it be relevant? I think not. And that guess is as good as any at this point.

      That the XBOX people are not making the Surface is a surprising and IMO colossal SNAFU. Let’s see what kind of RROD-moment the surface will have… 

      1. Iconoclysm says:

        I don’t think you know what vaporware is – or you do and are being extremely daft.  Release date?  October.  Price?  Comparable to other ARM based tablets of that size. 

        1. Adam MacBeth says:

          Hmm, so $499? If it’s priced higher than iPad it’s DOA.

    3. Jon T says:

      Read the article – what would make them a hardware company would be: making hardware – marketing and selling it – and demonstrating it had made them serious profit…

  6. Stocklone says:

    Why would Microsoft need to build a WP8 phone when you will have Nokia turning out some absolutely gorgeous hardware? And this time with high end specs and features. 

    1. riverlaw says:

      have you checked out nokias sell rates on the “gorgeous hardware”?

      1. Stocklone says:

        Microsoft handicapped the hardware by forcing manufacturers to use two year old internals and specifications.  Not Nokia’s fault. Not even Microsoft could have designed a phone that sold well while being handcuffed like that.

        1. And then kneecapped them by not offering backwards compatibility, so anything you buy now is guaranteed to be obsolete within 6-12 months.

          1. madmaxmedia says:

            Good thing for those 2 year old internals!!

        2. reagan9000 says:

          Microsoft is “skating to where the puck was”, as Gruber would say.

        3. Sergio says:

          So why did they agree to it? You say it’s not Nokia’s fault but it is certainly Nokia’s fault that they decided to use a mobile OS that required outdated specs when they could have switched to Android years ago and be where Samsung is now. I have no doubt that Nokia can build hardware that is far superior to the plastic junk that Samsung keeps pumping out. Maybe there’s something to those Elop as a Trojan Horse conspiracy theories after all.

          1. Stocklone says:

            It’s a shame Nokia was so stubborn and waited 3 years after Android dropped.  Had Elop switched to Android in 2011 they would still not be a powerhouse.  HTC, Motorola and LG all continue to struggle.  This is despite releasing some really nice hardware to go with Android. Android is not a magic bullet at least in terms of time available when they left Symbian. Maybe if they switched in early 2009 but that’s not Elop’s fault. 

      2. Bvs says:

        It’s software issue.

      3. orthorim says:

        If Nokia were a reasonable company they’d have done Android devices 2, 3 years ago. They’d now be competing with Samsung for the top spot in volume. Instead, they keep burying themselves deeper and deeper with software platforms that nobody has asked for.

        Oh Meego was pretty good – if late – too. But no. Nokia is dead, certainly until they abandon WP for Android, which they won’t so…. they’re dead.

  7. Adam MacBeth says:

    Of MSFT, GOOG, AAPL, Microsoft is the least platform-agnostic out there. They have very little idea how to build good cross-platform (non-Windows) experiences. We’ve already established they can’t (or won’t) do deep/vertical, but if Apple and Google are going to do horizontal better, that strategy is doomed.

    I really wonder if with a tech leader at the helm the story might be different. Microsoft has the capabilities to do vertical integration just not the will/culture. If Amazon can spend however many billions they are on their Android strategy with a bunch of bush-league non-technical leaders who’ve never built anything consumer before, then Microsoft certainly could. Then again, it would have to be an external CEO candidate, which seems unlikely; every time I hear Sinofsky say “no compromise experiences”, I think “no balls leader”. He can’t do it.

  8. Nick Murphy says:

    What does Microsoft due about their future eroding margin if they don’t sell hardware? It looks like they have little choice as the iPad/iPhone/Android have destroyed the margin on software. Unfortunately they may have to sell hardware despite not being good at it.

    Great article on how much revenue and margin MS needs to maintain to not shrink the company. How do you do this when the average selling price of software on Apple’s App Store is $1.24?


  9. Alfiejr says:

    Design and Building Hardware is NOT easy. just to note historical facts: the XBox V.1 hardware was awful. an estimated 1/3 or more of all units from the first several years failed. MS finally dealt with those flaws in the current V.2 model. but it is still a very noisy box. not a great piece of work.

    and the XBox succeeded in the market for one and only one reason despite that: Halo, which MS got sole rights to when it bought Bungee. that was a great marketing move. but it sure ain’t hardware.

  10. chinch987 says:

    sorry charlie 😉 too much tripe from a “wp7 series” guy. Unfortunately you guys never saw big picture and were way too late in every trend (WP7 should have shpped when Kin did).

    You’re a smart guy… you think MS is opening “retail stores” to sell sql server? Office365 subsscriptions. ROTFLMAO. Microsoft is and must become a “hardware company” ALSO or it will be irrelevent outside of the business space in short time. Not exactly a rocket science just another trend (that MS seems to now have noticed unlike when it bought danger or it’s sharp/verizon “partnership” in mobile space)

  11. teamdave™ says:

    im pretty sure that a company that makes mice, keyboards and webcams is a hardware company
    and what about kinect? zune mp3 players? the surface table? and now a tablet?
    but they will never be a hardware company? ooook

    1. I’m pretty sure you didn’t actually read the post. If you had, you’d see that my point is while Microsoft will produce SOME hardware that will be a very, very small part of what Microsoft is.

      1. teamdave™ says:

        im pretty sure i didnt either 🙂

  12. Joshua Drake says:

    I know I’m so very very late to the party, but the Zune, really? I won one for free at Tech Ed, and never opened the box till my iPod mini died. The device is horrendously bulky, the controls clunky, the audio jack in the worst possible place, and the complete lack of consideration for user preferences (play order, for example) all combine to make the device a travesty when compared to even the original iPod.

    Even the hokey attempt to copy Apple’s “designed in California” text was a failure.

Debate this topic with me:

This site uses Akismet to reduce spam. Learn how your comment data is processed.