Microsoft’s OEM Disappointment

One of the great business partnering stories in history is the relationship Microsoft has had with its Original Equipment Manufacture’s.  It was a business built at the dawn of the PC revolution and it generated billions in revenues for all who participated.  The companies were legendary Dell, Compaq, Gateway, Acer, etc..Then there were the big boys IBM and HP.  At the center of it all was the company that created the magic, the software behemoth: Microsoft.  They created the licensing models that allowed anyone who wanted to start a PC company could participate under Microsoft’s terms.  The relationship had its ups and downs, but as long as revenues were followed by growth and profits, all was well.  However since the turn of the century things have started to change very rapidly.  And relationships that were once supported by a solid foundation have started to fracture and crumble.

Starting in the eighties and continuing up to current times Microsoft had  a powerful and unique relationship with its OEM partners. The OEM’s were dependent upon Microsoft to make the investment in operating system improvements to help drive the next wave of PC purchasing. They were very interested and engaged in Microsoft’s launch plans.  Desiring to be on stage with Bill Gates when the next OS wave of innovation was released.  It became “modus operand” for both Microsoft and its OEM’s.  It would be nice to say that Microsoft worked closely with its OEM’s in designing the latest  hardware breakthroughs, but that would not be exactly true.  Of course testing was done to make sure everything worked but the look and feel of a PC was left entirely up to the OEM’s.  It was more or less Microsoft would release the latest version of Windows and throw it over the wall to all the OEM’s.  It was up to the OEM’s to create the hardware magic.  In hindsight this should have been an early indication that things were headed in the wrong direction, because no matter who the partner the end products all looked pretty much the same.

As time passed the relationships became strained, as all partnerships do over time.  Both Microsoft and OEM’s became guilty of waiting for the next Windows 95 moment.  In doing so they viewed the industry business models that had been created so far as eternal in an industry that never rests on its laurels.  All the while a generation of youth were growing up with technology and wanted to push boundaries, as every generation of young adults has done since the dawn of man.  It seemed as if the OEM’s could never push limits of design as much as Microsoft hoped they would.  Microsoft had strategically stated it was not a hardware company and wanted its partners to takes Microsoft software and create something breakthrough.  As a result Microsoft was not very interested in getting too involved in hardware design.

Microsoft would try to take its OEM business model further as it pushed into the mobile phone space.  The difference here would be that there were already incumbent phone manufacturers and the competition would prove fierce.  Part was competitors creating their own eco-systems of developers and applications. There was strong competition from the likes of Nokia and RIM.   A second factor was that many OEM’d and ODM’s had learned from the PC model not to cede too much control to Microsoft.  They had options and used those   as leverage in negotiations.    Despite all this up until 2007 Microsoft was making headway and it seemed on the verge of another great success

This stated to fall a part with Apples successful iPod franchise as digital music and Apple became synonymous with one another. Despite many efforts and a lot of talk that “x” device was the iPod killer, the focus was never quite there in the OEM channel or at Microsoft as the margins on these low-end devices was not the same as a PC.  If you looked at the time a few simple design elements went along way for Apple.  Namely the “wheel”. Billboards  popped up all over the country with kids, color and iPods and most importantly they looked like they were having fun.  Even Bill Gates buddy, U2 front man Bono was bought in.  Young people like to have fun.  What seemed to go almost unnoticed was the money being made on a service called iTunes.  For every $.99 spent on a song, Apple made $.20 as I learned in my meetings with Universal Music.  When you sell over a billion songs that starts to add up.

The launch of the iPhone was simply that dagger that changed everything and put the competitive market place into warp speed. Since that day the market place has heated up with a number of companies providing new smartphones and tablets.  Probably most disappointing to Microsoft has been there OEM partners in ability to create or design anything of market interest. But then that is how the Microsoft OEM channel was built.  Not to think.  In the old days you could have any PC color you wanted as long as it was beige.  But things stated to change quickly, first with rather mundane things with color.  The MAC had lime green and tangerine.  then smartphones (not that OEM’s cared  about phones) and finally tablets.  Apple  then launched the immensely successful iPad. Now Tablets were a problem.  Because they interacted with customers in a different way and it was a different way that consumers really enjoyed.  It was not anticipated.

When the iPad and hit the market, followed by Android based devices it seems like the OEM model could have been re-invented.  A tighter and closer relationship was needed between Microsoft and its traditional OEM’s.  Microsoft understood the software and the OEM’s understood the hardware, specifically the hardware supply chain.    They could have basically selected several OEM’s and created a tight working relationship via an incubation project.  Combining engineering teams on both sides.  But perhaps it was the large numbers Apple was posting every quarter, with 30 million iPads sold.  Android was increasing its share.  The OEM’s continuing to create a variety of form factors that no one was interested in.  In the end all these things led Microsoft to abandon its long-standing partners in favor of building their own hardware.

In the end I think the model of throwing the software over the wall led to the undoing of Microsoft’s traditional partners.  I believe that a lot of the blame does lie with them as they never seemed to get out of the mode that had made them so successful and update their business models to better anticipate and understand the consumer.  It started simply with music player but as time passed it evolved to challenge the netbook and laptop markets, and Microsoft’s OEM’s did not seem to be up for the challenge.  Because of this failure, it more or less forced Microsoft’s hand to enter the business of building their own devices (and acquiring Nokia).  This will create new challenges.  Microsoft needs to construct a supply chain, as has often been said in business “building a product is easy, building a supply chain is hard”.  Case in point Apple is investing $10.5 billion just in its supply chain (read Bloomberg article).  For Apple the supply chain already exists, the $10.5 billion is incremental investment in its supply chain.

Microsoft had such great hopes and a strong belief in its OEM channel.  It’s amazing that not one of them could do better.  Not one has pulled a Samsung.  It was as if they were waiting for Microsoft to provide them guidance  on what to do next, rather than investing and more importantly understanding the changes underway in consumer markets.  I can only surmise at this point that many senior execs at Microsoft were very disappointed in what their OEM’s were able to deliver to the market with each subsequent release of Windows. There is plenty of blame to go around, but OEM innovation is high on the list and now we are left with could have, would have, should have.

Good Night and Good Luck

Hans Henrik Hoffmann November 14, 2013

Categories Uncategorized

YouTube Music Awards 2013 – Brilliant

No this is not a review of the award show. I follow music and have since I got my first records (John Denver and Glen Campbell). I love music. I love award shows. But to provide a review of the award show would not be my forte and would be a departure for me. I am, however, interested in how well it was perceived and received and what it means.  The YouTube Music Awards did get free coverage on the “Today” show.  More importantly the YTMA shows the convergence of entertainment and technology in a way that not only the entertainment industry makes more money but the technology industry will indirectly generate billions in revenues.  In my humble opinion this is a highly entertaining way to generate more revenues for Google. Specifically more ad revenues for Google. It will also challenge the status quo of television programming as more content is delivered “over the top” versus traditional agreements with the Cable (Comcast, Cablevison etc ) providers and their content partners (Disney, ESPN, Fox, etc..).

When you think about it, it is not too hard to see how this came about.  Technology and Hollywood have always had a very close relationship.  When the digital revolution started to take off one of the first industries to feel the effects was the music industry.  It first started with the development the compact disc, however that was pretty much business  as usual for the industry.  Vinyl was simply replaced by the CD.  Then two things occurred.  The internet and the iPod.  The iPod made the playing and purchasing of music a completely different experiences.  Today with 80gb iPods I can store more music than I ever could hope to own pre-iPod and internet.  Then the idea of streaming video started on the internet (Remember the Real Networks video player?). Then YouTube became the place to watch music video, killing the need for MTV.  I could not watch the video I want without waiting.  The world of on-demand was starting and changing the face of television programming.

The YouTube music awards cater to the younger audience.  This is how they consume a lot of content.  New artists are introduced on the web, not on cable networking anymore.  Because it is the web the artist are introduced to larger and global audiences. The Ryan Lewis and Macklemore video for the song “Thriftshop” has been viewed over 448 million times.  The YTMA winner Girls Generation video has been viewed 74 million times.  Justin Bieber started here. YouTube has become the place for new artists to get their name out and by-pass traditional music industry channels.    It was just a matter of time before it made sense for them to have their own Music Awards show and do it over the internet, thus bypassing the traditional television channels.

The real winner in all this is the company that had the foresight to predict and bet on this shift: Google.   It Is not hard to fathom that every time a Google exec watches traditional TV it is viewed as lost revenue.  No search capabilities, limited interaction with television set.  Since the days before the internet there were those who were betting in interactive TV.  Former Microsoft CTO, Nathan Myhrvold believed that to be the future.  It may still happen but if it does the internet will be its backbone.  The thing to keep in mind about this is Google makes money on search, but in order to make a lot of money in the search advertising business you need traffic.  Google is using YouTube to expand its potential audience for search.  In the end however it is all on the Worldwide Web.

A lot of Google’s success can be contributed to indirect selling models.  The YouTube Music Awards are yet another example of where Google will leverage viewer eyeballs to generate more search advertising revenue.  As time goes by and the viewer ship increases so will Google’s ability to monetize those net new viewers and increase the average revenue per user (ARPU).  They will then funnel this money to other ventures that will either contribute or fail, but Google will always be pushing the needle.  If the YTMA is a big commercial success could we see scenarios similar to what Netflix is doing and have Google generate its own premium content?  I would guarantee this scenario coming to fruition.

When Google bought YouTube some viewed as a poor purchase, one that would spend most of its time in litigation, but Google obviously saw a brighter future.  Now with the success of the YTMA one can start to envision what this will be.  One of the holy grail’s of consumer technology has always been cracking the code to utilize and monetize the last great user interface: television.  It turns out what was needed to make this happen was a connection to the internet.  Then once you have this internet connection  how do you drive traffic to where you want it?  This gets back to the old axiom “content is king”.  If you have the right content they will come.  It is also important n this day and age to get younger audiences engaged as they are the first consumers of technological shifts.  With YTMA awards and other new internet content (primarily from Netflix) we could see the age of interactive TV finally begin to be realized.

This is a brilliant idea and move by Google that will garner them a lot more of positive press and attention to their brand.  It also threatens to leave their competitors in their wake as they struggle to create an even tighter relationship with the entertainments up and comers and its elite.  Apple has the relationships but the integration between the device and the web is not nearly as tight as Google (Search, YouTube, Android, Chrome etc..). Microsoft may be better positioned with the XBox and its gamer community.  More importantly many of these games are going Hollywood as games are turned into major motion pictures.  Where Microsoft is hurting is it has a weak music story and poor track record in the industry, plus it is way behind in the devices landscape.  Google is leading this decade as they right now are in the zone where they have more foresight into the future and where things are headed.  It is rarefied air that they exist in right now.  Having been through this before the danger is thinking it will last forever.  As long as you are scared of the future you stand a chance of success.  When you take the future for granted you are doomed to failure.

Good Night and Good Luck

Hans Henrik Hoffmann November 8, 2013