The Surface Book has presented an interesting conundrum for PC makers who are Microsoft’s biggest partners, generating billions in revenue per year.
Sales in the PC industry are declining at around 11% per quarter, according to IDC, causing drops in profits for PC makers. Microsoft is somewhat insulated from this decline thanks to big enterprise sales, but the company’s increased focus on hardware with the new Surface Book Pro – a high-end laptop with a touch screen – is making its partners anxious.
“[Surface] will bother OEMs and I know from conversations with OEMs they have mixed reactions,” says analyst Annette Zimmermann of Gartner. (Microsoft historically calls PC makers “OEMs,” or “original equipment manufacturers.”)
Business Insider spoke to one source at an PC maker who described Microsoft as a “sleeping lion.”
A fundamental shift
Until 2012, Microsoft steered clear of making PC hardware because it already had an army of companies willing to do so. Even then, the first Surface computers were more like tablets with optional keyboards, something that most PC makers hadn’t previously bothered with. They were mainly intended to show off the new touch-friendly interface that was front and center in Windows 8.
The tone has changed. Microsoft is now making a self-described “ultimate laptop,” as opposed to a tablet, placing it in direct competition with PC makers such as HP, Dell, Lenovo, and others.
Unlike Microsoft, which makes billions of dollars from software, PC makers make most of their money from selling hardware. Having Microsoft move into the industry – with its deep pockets and aggressive attitude – won’t feel good, but there is nothing Dell, HP, Lenovo, and so on, can do.
According to Zimmermann, Microsoft’s aim is to ship enough devices to create awareness for Windows 10, but not enough devices to alienate its PC partners.
But there’s a natural conflict in those goals: Like any business, Microsoft ultimately wants to be the best, and this may involve shutting PC makers out.
Marketing to Apple loyalists
So far, Microsoft has not advertised the Surface Book by comparing it to anything running Windows.
However, this strategy may have a problem.
“The Surface Book will have a harder time stealing away MacBook users,” says Linn Huang, an analyst for IDC. “The Apple brand has been sticky, and I don’t have much cause to think it won’t continue to be in the immediate future.”
This “stickiness” is a problem for Microsoft who, in order to generate sales, will need to start appealing to high-end Windows users.
While Apple dominates the high-end PC market, manufactures such as Lenovo, HP, and Dell (who own Alienware) all sell multi-thousand-dollar laptops. These customers are already primed to use Windows and can easily be converted to a Surface Book.
This is a scary prospect for PC makers.
Owning the whole widget
- REUTERS/Kimberly White
While Microsoft is “not trying to become a second Lenovo or HP,” according to Gartner’s Zimmermann, there is still an implicit threat to the PC makers who make money selling machines which run Windows. By owning both the hardware and the software, Microsoft is in a far stronger position than PC makers who only own the former.
For instance, Windows Hello, a security feature that can unlock Windows 10 with your face, has been lauded as one of Book’s best features. (This feature is available to PC makers through Intel RealSense cameras, but Microsoft apparently isn’t including Intel’s technology.)
Simply put: Microsoft makes the software and so it can tightly integrate it with the hardware.
This is something Steve Jobs described as owning “the whole widget” – and customers love it. Apple’s strength has always come from being able to offer software that works perfectly with hardware on both the iPhone (think Touch ID) and laptops (think trackpad).
“Like Apple, Microsoft wants to appeal to users with an integrated hardware-software experience but the people who rushed to buy the Surface book so far are not Mac users,” says Zimmermann. In many ways, this is actually even worse for PC makers: Microsoft has already started to steal customers.
The problems don’t stop there, however. Having Microsoft in the hardware game “puts the OEMs in an awkward position,” says Zimmermann.
When the company merged the Windows software and hardware divisions under Satya Nadella, PC makers must now “share their [product] roadmap with the same people who are responsible for hardware at Microsoft.”
This conflict – that PC makers have to share certain product plans to get Windows 10 – has never been addressed by either party, and will only further tensions between the two sides.
But there’s nothing PC makers can do. People want Windows PCs. Microsoft makes Windows.
As Zimmermann says: “They don’t really have a choice, right?”
The Halo effect – maybe.
The combined forces of a market down-turn with a militant Microsoft make the future seem very bleak for PC makers, but there may be a silver lining.
“I think the Surface Book concept and design is fantastic,” said IDC’s Huang. “[But] at the current pricing levels I’m not sure it’s anything other than a halo product.”
A “halo product” is one that lifts the image of everything else – in this case Windows laptops – up. In other words, the beauty and quality of the Surface Book will make a consumer more inclined to pick up a $400 Windows laptop just as the $2,500 MacBook Pro incentives people to buy the $849 MacBook Air or the $499 Mac Mini.
Another bright spot: For the time being, Microsoft still needs the PC makers to get to its goal of selling a billion Windows 10 PCs in the next few years.
John Delaney, an analyst from IDC, told Business Insider that “Microsoft is trying to bring excitement to the Windows vector” with the Surface Book, and the company needs others on-board to help fuel the fire.
Some PC makers, Dell and HP, have even set up deals to distribute the Surface Book to big companies through their enterprise consulting businesses.
“The truth is, we have entered a period in the industry where winning for the major players is no longer solely about capturing share, it’s about expanding the company’s footprint in the value chain,” Huang told BI.
Just how PC makers are going to continue creating value is, however, the multibillion dollar question.