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

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