Microsoft has scheduled a major announcement for later today and the press and blogosphere has decided they are going to announce a Microsoft-branded Tablet. Perhaps I missed it, but I haven’t noticed anyone citing a leak from an ODM or any other data to substantiate this conclusion. It seems to flow from a combination of wishful thinking and a process of elimination. So I’ll provide what little data I have and some analysis, then we’ll wait a few hours and have some answers!
Back in the 1990s Microsoft’s OEM model was humming, with Microsoft, component suppliers (particularly Intel), and OEMs all doing very well. The OEMs benefitted from cross-manufacturer economies of scale that let them make good money while undercutting vertically integrated competitors like Apple by substantial amounts. But in the 2000s the transition to notebooks severely undercut the cross-manufacturer economies of scale. At first OEMs could command premium prices for notebooks and thus they improved margins, but eventually price wars broke out. OEMs had to find ways to bring in addition revenue and lower manufacturing costs, and they came up with disturbing solutions in both cases. They raised revenue by accepting payment for putting third-party software on their systems, which we now know as crapware. Since they could no longer rely on multi-vendor economies of scale they focused on their own economies of scale. The best way to do that? Focus only on the highest volume designs. They would make stabs at truly premium offerings, but it seemed neither they nor their customer base were that excited by the result. For the most part the PC ecosystem now focuses on inexpensive mediocre systems that get e job done but elicit little passion from consumers.
Meanwhile over in the gaming space Microsoft wanted to introduce a system and approached OEMs about it. Since gaming systems are a razor/blades model (lose money on the gaming console, make it off game sales) the OEMs weren’t interested. Microsoft had to get into the console hardware business on its own. In the music player business Microsoft initially followed the OEM model, but when none of the OEMs could stop the iPod juggernaut it chose to enter the market itself with Zune. While unsuccessful in the music player business itself this let Microsoft build the infrastructure and other expertise it needed to compete with Apple in other endeavors. The Xbox Music and Video store that is appearing across Windows, Windows Phone, and Xbox is a direct dependent of the Zune work. The Windows Phone and Windows 8/RT is another outgrowth of the Zune effort. Microsoft had a rough start in the systems hardware business, but has now built up the experience and success (with the Xbox 360) to be a real participant.
Microsoft hasn’t brought it’s own systems into the mainstream markets yet. When evaluating how to respond to the iPhone it debated doing its own device and decided to stick with the OEM model. Before Nokia came on board that was looking like a bad decision. The decision looks better now, but if Nokia fails before completing its own transformation then Microsoft will be back to deciding if it should be in the mobile phone hardware business. Meanwhile I’ve detected a subtle change in the attitude of Microsoft employees. For years my co-workers and friends would debate merits of the OEM business model over beer. Recently when I’ve commented to friends that Microsoft might now be able to get OEMs to produce hardware that is really competitive with Apple they’ve responded with “we know”, not “I know”. That’s a pretty thin thread to hang a claim Microsoft will introduce it’s own Tablet on, but it is all I have in terms of inside information. Personally I think I’m just imagining the shift in tone, but maybe there is something to it.
Microsoft is going to have no problem getting OEMs to build great business-oriented Tablets. But Consumer-oriented Tablets are a bigger question mark. If they build a super-premium “iPad killer” the OEM probably can’t get the volume to make money versus Apple. Just as with Windows Phone they will try to use the same designs for Android and Windows designs in order to improve their economies of scale. And Microsoft would have to fear that there won’t be any killer Windows-specific designs on the market. Doing its own high-end device, perhaps more to create excitement than to be a high-volume product, becomes attractive. OEMs would still get the volume segment of the market, but Microsoft would set the tone with something really attractive versus the iPad. So there is an argument for Microsoft introducing its own iPad competitive hardware, but it certainly risks alienating OEMs. There is a more compelling argument for Microsoft addressing the low-end of the market.
The Kindle Fire has created a situation at the low-end of the market that makes it just like the gaming console business, it is a razor/blades model. You lose money on the Tablet and then make it on all the books, videos, music, and apps that you sell the Tablet owner. Just as with the Xbox Microsoft would find it difficult to get OEMs to participate in this model making, perhaps even forcing, Microsoft to do it themselves. Last week Mary Jo Foley speculated that today’s announcement would be for a Kindle Fire competitor, and if there is a Microsoft-branded Tablet announced today then I think we’ll see she was right.
There definitely is a case for Microsoft to introduce its own Tablets, though I don’t know if that is what we’ll see today. We could also see B&N introduce a Windows RT-based Nook, or an announcement completely unrelated to Tablet hardware. Given that the announcement is in L.A. We could simply be seeing an announcement of a major relationship with one or more Hollywood studios to provide content for Microsoft properties. I know the process of elimination has tried to rule this out, but I think it is still a possibility. Fortunately we’ll know soon.
Personally I hope Microsoft does introduce its own Tablet. Then it won’t be able to make excuses about its success, or lack thereof, in the Tablet market.