Should software and online vendors be in the hardware business?

Should software and online vendors be in the hardware business?

Summary: Some warn that software and online companies need to tread carefully in the hardware space, as it is fraught with peril.

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Microsoft recently unveiled its Surface tablet running Windows 8, representing something very new for the vendor: it's first major foray into the enterprise and computer user hardware space. Other formerly all-software companies have also been getting into hardware. Google offers its Nexus tablets, manufactured by Asus. Amazon has been in the hardware space with Kindle. A couple of years ago, Oracle became a hardware vendor in its own right when it acquired Sun Microsystems, with its line of servers, workstations and appliances. 

Tablet-Microsoft Surface-Photo by Microsoft Press Relations
Microsoft Surface: Sleek, and something never seen before from this vendor.

It would seem a trend -- major software vendors getting into hardware sales. But is this a good strategy? For years, in fact, many major tech players have been running away from the hardware model, which is highly commoditized. Apple stands out as an exception, with its tightly integrated iPad, iPhone and iMac offerings.

The hardware approach works only if the hardware products are employed as a lever to draw subscriptions and software sales, say some experts. Microsoft sees the opportunity, and Amazon clearly has realized an advantage as a way to sell content.  However, software and online companies need to tread carefully in this space, as it is fraught with peril.

"At present, this model is limited to only a few players," says Andrea Matwyshyn, legal studies and business ethics professor at UPenn Wharton. "The services model definitely works for Amazon, given its content library with books and its expansion into [streaming] movies and TV. [But it] is more challenging for those companies without content licensing." On the other hand, companies focused solely on hardware, such as Dell, Hewlett-Packard and Lenovo, face the prospect of falling profit margins as more diversified firms find new ways to monetize hardware devices."

The enterprise market is a different animal than the consumer market. A healthy mix of hardware, software and subscription offerings can be a strength for vendors selling into the enterprises. "Services mean something different in the enterprise context -- more consulting than apps or content," says Wharton legal studies and business ethics professor Kevin Werbach. "Having a foot in hardware as part of an integrated package is valuable; that is one reason Oracle bought Sun Microsystems. But none of the major enterprise IT players is focusing on hardware as the key differentiator or revenue generator anymore."

In fact, as reported in PwC’s latest US technology M&A Insights Q3 2012 report, big tech vendor deals have been down, indicative of an underlying shift away from transactions in both hardware and traditional manufacturing-based technologies.  “As the larger technology companies evaluate their hardware portfolios and pursue potentially higher-margin software and service offerings, a wave of new acquisitions could be on the horizon as these traditional businesses change hands and new acquirers seek greater cost efficiencies,” according to Rob Fisher, PwC’s U.S. technology industry transaction services leader.

Topics: Tech Industry, Enterprise Software, Hardware

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9 comments
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  • It's the Coke & Pepsi syndrom...

    Little to no growth, so overtaking other areas related to its field becomes norm, in order to display some inkling to growth.
    Garrantsson
    • Yes and no;

      There's a couple of issues going on. In amazon's example you're spot on i think. They commanded the online marketplace relatively quickly and began looking for new areas to invest in. Kindle gave them an opportunity to lock out competitors and create an ecosystem and the tablets are a logical conclusion for them after the money they have seen Apple and Google make from their mobile device and subsequent store sales. They are following in the wake of google who have been very successful in the area. Google however are slightly different; they've been in smart devices since the beginning. They saw where the tech was going and used their search engine revenue to create a software platform in alliance with existing experienced hardware manufacturers. For them designing hardware has always been the next logical progression; they use them to drive innovation on their platform after being frustrated with the progress their gardware partners were making. This has evolved into a brand of it's own.

      Microsoft, are of course the most likely to progress to hardware. 30 years of designing os and software across others hardware has given them the most experience of what hardware is successful and what isn't (zune) in the desktop era they became mega rich selling software. Back the. Making hardware would have been a fools errand; placing them in direct competition with their oem's and risking creating a proprietary platform (apple were loosing money hand over fist with that one.)

      The mobile era is something new, it caught them out; their early attempts to move windows to mobile were horrific and as a result android took windows place as the standard. This left them with no real choice but move to hardware to create a brand.

      Where amazon may be moving into an unknown area to boost profits, google are actually one of the early players on this tech and microsoft are attempting to preserve their companies' future profitability.

      Unlike the article I don't reference apple as they're really a hardware company turned software one. There wasn't much special about the apple2's DOS, but along with tandy and commodore they were the first in home pc hardware.

      Over all I don't see any problem with it - they all get the hardware guys to do the building, and after all software companies having more say in the hardware their software runs on has the potential for a better end-user experience.

      With the likes of Microsoft in particular
      MarknWill
      • Scratch last comment

        Particularly ms... Typo
        MarknWill
  • Joe McKendrick is right here

    Having worked at three major hardware vendors, I can tell you they lose money more often than make it. And companies like MS will have to eat any hardware not sold, cutting into their already deflated stock. It's not a profit space; never has been except for the criminals at Apple.
    zaine_ridling
    • Probably poppycock

      "I can tell you they lose money more often than make it"

      No they don't. Margins may be thin, but anyone in that position would go bankrupt pretty fast.
      D.T.Long
    • already deflated stock

      http://finance.yahoo.com/echarts?s=MSFT+Interactive#symbol=msft;range=2y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

      deflated compared to what ? the same time last year ? look at the chart !!!!..

      learn a thing or two.
      Aussie_Troll
  • Big steps, little steps

    Barnes & Noble, Amazon and Microsoft have taken little steps and partner with OEMs to create branded tablets. For both Barnes & Noble and Amazon, tablets are primarily personal shopping carts for their customers and do not represent profit centers in an of themselves. Whereas Microsoft wants to be like Apple and make tons of money from its Surface tablets, both Windows RT- and 8-based.

    Google started out with little steps for their Nexus line of Android-based smartphones. And they continue with little steps with Nexus devices, both smartphones and tablets, manufactured by their OHA OEM partners. However, their acquisition of Motorola Mobility, even if for the patents, was a big step. Especially given the high premium that Google paid for Motorola Mobility.

    Similarly, Oracle's acquisition of of Sun Microsystems was a big step. Oracle has quit Solaris workstations as well as Solaris x86 servers (both HP and Dell sell servers for Solaris x86). Instead, they are concentrating on high-end SPARC/Solaris servers. In Oracle's case, they want to be like IBM (they have a long way to go) and make a ton of money from high-end servers.

    Both Google and Oracle have a lot more skin in the hardware game than do Barnes & Noble, Amazon and Microsoft.
    Rabid Howler Monkey
  • Seems no one has heard about the Xbox

    That's hardware in my book
    hubivedder
    • funny that, I was thinking the same thing

      and that turned out quite ok too as far as I know, enough for the Freetards to want to use it for their own evil ends...

      if it's good enough for the freetards it's good enough for me.
      Aussie_Troll