The competitive 'problem' in the tablet market isn't the OEM business model

The competitive 'problem' in the tablet market isn't the OEM business model

Summary: Analysts point to Apple's tight integration between software and hardware, the result of which are then sold in its company stores. They say the old OEM business model is the problem. No way. Ask Apple.

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Yes, Microsoft and Google, for the most part are OEM operating system vendors, and have recently announced branded tablet computers that hope to take on and beat Apple's iPad in the market. Microsoft recently announced its branded Surface tablet-laptop hybrids that the company has designed, will produce and sell. It won't come out for perhaps a year. Google last week took the wraps off the Nexus 7 platform, a 7-inch tablet.

The thesis from a number of analysts is that the OEM business model is broken. Certainly, both Google and Microsoft are breaking ties with former OEM partners. For example, in a short NPR piece I heard on the air before the Nexus 7 announcement, Steve Henn, an NPR reporter, spoke with some hardware analysts about the tablet market. He said that the old model isn't working any longer.

For years, Bill Gates at Microsoft took a totally different view. He concentrated on selling software. And in the late '80s and '90s, Microsoft nearly destroyed Apple this way. And when Google decide to compete against Apple in the smartphone business and create Android, it borrowed Microsoft's old strategy - focus on the software. But in tablets this just isn't working.

According to Carolina Milanesi, Research VP in Gartner's Consumer Devices group, this is a "trend." The reason? "It points to the tight integration that software and hardware have to have in order to be successful," she says in the story.

Check Out: Is Surface Microsoft's last-gasp pitch to keep IT shops Windows-only?

So, in Milanesi's view, the market for tablet devices is fundamentally different than that for PCs. Tablets require a greater degree of integration, so that OS and device hardware come from the same vendor. The OEM OS and software model, which has worked for more than 30 years, isn't right for a new class of devices, she said.

Of course, close integration between hardware and software have always been an Apple value. Apple's lines of Mac OS machines were highly integrated and Apple branded. Starting only in 2001, did Apple open up its retail stores.

But recall that despite the Mac's greater degree of integration, better quality hardware and superior OS, the Mac only held a small share of the desktop and laptop market. And OS X machines are still only a small piece of the PC market: around 5 percent and 12 percent, respectively, in the worldwide and North American markets. An increasing share but still very small.   

Check Out: OS X, iOS still making market share gains

In the 1990s, Apple was viewed as the problem child, the company with the wrong strategy and values. Customers rewarded the market leaders and the dominant Windows OS (and MS-DOS before that) platform. The Macintosh was left to scrape by with its loyal installed base of users and dominance in just a couple of niche markets. Industry pundits said that Apple should forget its hardware platform and make a version of the Mac OS for PCs — something that Steve Jobs tried with NeXT and its OpenStep OS, which sold to little success.

For years, PC vendors and Microsoft pushed innovation in a drive to lower the entry-cost for customers, leading to some mixed results in the Q&A department. Meanwhile, Apple kept refining its hardware and software integration, its OS and hardware innovation, and developing its retail operations.  

I had to smila at part of Mary Jo Foley's analysis of the Windows market in Bring on the Pablet: Why I am bullish about Microsoft's Surface:

Sadly for us consumers who've wanted Windows PCs, the innovative models have been few and far between. Everything looks the same. The trackpads are awful. There are almost no models with matte screens, only glossy. Battery life on most models is... meh. And don't get me started on the crapware preloading that is still going on out there.

Yes, I understand PC sales are down and pressure on OEM margins is up. But the solution isn't to keep churning out me-too machines. If HP decides to take its tablet and go home, I, for one, won't be shedding any tears. And it looks like my ZDNet colleague Ed Bott won't be crying a river, either. Like Bott, I believe the times and the competition have changed in a way that requires new tactics.

Microsoft execs, in introducing the Surface earlier this month, talked about their "pride in craftsmanship" with the coming devices. That should (hopefully) translate into "pride in ownership" with users. I don't think I'm alone in wanting a solidly made, beautiful-looking, distinctive PC and/or tablet. Apple users aren't the only ones willing to pay a fair price for something drool-worthy.

What is going to help sell Windows 8 is *the hardware.* Because Windows 8 works so differently from previous versions of Windows, Microsoft needs different kinds of devices to help sell it. The hardware needs to make the OS more palatable.

But must this new, palatable hardware come from better integration and branding? Certainly, there are vendors in the Windows space that have created excellent and compelling machines in the past and could so again. It's just that there hasn't been a perceived user demand for a machine that cost more and did more. Development has been focused around reducing cost.

Unhappily for Google and Microsoft, in the tablet market (and mostly in the smart phone market) Apple's iOS platform was out first and has come out on top in market shares. Microsoft, especially, has missed several product cycles.  

The fundamental problem for Google and Microsoft is the same as that faced by Apple back in the 1990s: it's very difficult to go up against a competitor with such a drastic market share advantage, and worse, against a company that is perceived as the market leader. In the late 1980s, the industry "joke" was that nobody was fired for choosing Microsoft and IBM. The flip side of the joke was that if an IT manager picked a Mac or other platform, then you might get the axe. It's the same difference nowadays with Apple and its iPad.

Playing catchup is profoundly difficult. It's one thing to call a product an iPad or iPhone killer and another to gain market share from a company that's selling double-digit million units in a quarter.  

And then there's problem that Microsoft and Google face in the hardware business. At the end of the NPR piece, Andy Hargreaves, senior research analyst at investment bank Pacific Crest Securities, points out that neither Microsoft nor Google have sufficient clout with component vendors. Apple has the purchasing power and the better margins.

I find the talk that quality is the reason that Google and Microsoft are integrating and branding tablets. Was there been some great shift in corporate culture at Google and Microsoft towards customer values and a true solution approach? Everyone took their Apple pills this quarter. Doubtful.

The real reason that Microsoft and Google want to get closer to their customers with a branded product is the same that some OEM hard disk drive manufacturers have been moving into the channel and retail markets. Follow the money: they want (need) the extra margin. It's not so much about challenging customers with quality or creating the proper hardware platform for their OS. It's the margin play.

Already there are warning signs on the margin front: There's no news from Microsoft on the cost of its Surface; reports are out that the Nexus 7 margins are near zero.  

Topics: Tablets, Android, Apple, iPad, Operating Systems, Windows

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59 comments
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  • Innovation stagnates under a monopoly

    You wrote: "For years, PC vendors and Microsoft pushed innovation.."
    This statement absolutely WRONG. I was there before Microsoft and still here. With the Microsoft monopoly and their collusion with OEM's, innovation stagnated for over 10 years. So I support any move to break up the Microsoft dominance.
    root12
    • You're so wrong...

      Microsoft, in the enterprise space has been innovating for years and years along with their hardware partners.
      kstap
      • He is 100% right.

        The only innovation was cheaper and cheaper hardware. Heck, you can still get ISA cards and slots on motherboards.
        Bruizer
    • innovation stagnated for over 10 years.

      Just curious - are you referring to the last 10 years or another decade? In the last 10 years, Microsoft and other associate PC vendors brought us PDA's, smartphones, Embedded, XP, the GPU, DX10, multicore processing, remotefx, Windows Vista/7, tablets, cloud storage and applications..... Not quite sure where you are coming from?
      12312332123
      • He's talking PC desktops

        The main bulk of Microsoft's monopoly.

        I'd hardly call mobo UPGRADING from a P4 to an i5 INNOVATION
        CaviarBlack
        • That's your envy making you say that SB

          End of story.
          William Farrel
        • Envy of what, Wilieee?

          You being a fool?

          lol....
          CaviarBlack
        • Oh.. you want to narrow the scope to suit your view....

          that doesn't make any sense. I listed a number of devices that were not PC desktops and Microsoft produced many of them. What does qualify as innovation then? What are you talking about? Or are you just making things up.....?
          12312332123
          • The difference between MS innovation and Wintel innovation ...

            I don't think it's right to compare Apple's innovation across its total hardware production, OS, software, development platform, remote services and support infrastructure and Microsoft's innovation, which is a subset. So, MS's hardware partners did the boxes, which mostly focused on driving cost down, rather than making fundamental changes in I/O, connectors, display and bus implementations.

            thanks for reading,

            david m.
            davidmorgenstern
          • Apple did what now?

            This is what really happened. Apple made an iPod (its an mp3 player). It was successful, but hardly innovative, especially in the context of saying that MS or Intel are NOT innovative. iTunes became successful in parallel and Apple grew a market. They released a Phone-iPod, called 'innovatively' the iPhone. It was an iPod touch, with a phone built in. It was crap and lacking many features, but was successful anyway. They later released an iPad, which was an iPod Tuch blown up to 10inches. All their products are essentially iPods in different shapes/sizes. All products still use iTunes and iOS. How is Apples so called innovation distinct from everybody elses?

            The nice thing that Apple sort of latched onto, was multitouch gestures and being able to manipulate things using the screen with your fingers, but they did not invent it and they certainly weren't the first to include a touchscreen with gesture support. As with everything Apple makes, it was just a different take on other peoples ideas. 'Remote services and support infrastructure'? I honestly have no idea in what sense Apple have revolutionised remote support services... honestly....
            Since basically nothing anyone else does is classed as innovation, you
            12312332123
        • The competitive 'problem' in the ... PC Desktops Innovation

          @CaviarBlack
          "I'd hardly call mobo UPGRADING from a P4 to an i5 INNOVATION."
          and what do you call them? just because the process is not stamp with apple, it is no longer innovation... the fact that apple replaced their core cpu from motorola to intel tells you a lot. even sun was wiped out by intel in its own space. sparc is nowhere near intel in terms of performance nowadays. if you don't call that innovation, i don't know what is? the only reason that people belittle any technology leap in the pc desktop space is because of the perception that they are cheap. those innovations were cheap because of the huge market that pc desktop served, and thus amortizing the cost of doing the innovation in the first place.
          kc63092@...
          • You need a dictionary.

            What Intel has done is iteration.

            Innovation would be a whole different platform than x86.
            Bozzer
          • Well good news

            We don't need to keep constantly changing cpu architectures at your behest, since x86 works perfectly fine and is SOOOOO much more powerful than alternatives, can't see most of us jumping ship completely for QUITE some time. If you want to change just for teh sake of it then knock yourself out.
            12312332123
      • LOL

        This new comment system lets you flag yourself... class!
        12312332123
        • Keep laughing

          Traxxion, I really don't care what you referred to. I was referring to what root12 was getting at.

          But keep deflecting the issue. We all know Microsoft's bread & butter is still enterprise desktops

          ~

          @User name not displayed (coward), what Bozzer said.
          CaviarBlack
          • So you did flag me! :p

            Deflecting? You haven't answered a single point anyone has made so far....
            So allow me...
            P4 to i5 IS innovation and not 'iteration' as someione condescendingly tried to assert. YOu do not need to change an instruction set in order to be innovative. the i5 is lightyears apart from a P4. Do you know how much engineering has gone into making the leap to 20nm? CPU power is all about innovation, squeezing every last drop of power out of that square half-inch. If you don't think so, then I'm sure the Intel engineers do not really care. I'm not an engineer and I don't care, because I know. So there you go...

            Now - PDA's, smartphones, Embedded, XP, the GPU, DX10, multicore processing, remotefx, Windows Vista/7, tablets, cloud storage and applications.....

            Perhaps you would care to explain how these were NOT innovations?
            12312332123
          • Yes I did!

            Look up the definition of "innovation". We all know you shills are loose with the flowing nouns and adjectives around here and some of us call you out on it.

            As far as I'm concerned the i5 is just an upgrade of a P4. It's still the same basic principle of iteration. I'd also say the same thing with the last few versions of Windows as well.

            Now the Microsoft Surface, I would call that innovation. I'm impressed with that. I do sometimes give credit where credit is due, even to your precious monopoly.
            CaviarBlack
          • OK I think I'm finished....

            I'm no shill and you still didn't answer my question. The i5 is not even remotely like the P4. You would be far better off trying to learn something, rather than being argumentative.

            Apart from being multicore, the i5 also integrates hyperthreading AND virtualisation, as well as 22nm technology. If you do not class that as innovation (you know, as in NEW) then there is nothing that can be called such. In such a world, the iPad is not new, because it was a mere iteration of a phone and music player. The iPod was not new, because it was just an iteration of existing mp3 players. Is it only an Apple logo and white plastic which you are able to classify as 'innovation'? Or, is it only ARM processors that you believe to be new? I've got news for you - they ain't. ARM has been at the heart of every phone I've owned for the last 13 years. iOS was not innovative in the least. Full screen apps and 16 icons on screen is startlingly familiar if you remember MSDOS and old school GUI's. Touch screen? Nope... touchscreen phones are pretty old.

            Oh... I do apologise for being able to form a sentence correctly. I'm sorry that you find it offensive. As you can see above, I'm trying to help you out by listing as many things as possible, but since you still haven't acknowledged a single line I am not really too hopeful.
            12312332123
    • They did so push innovation ...

      ... they pushed innovation aside!
      harvey_rabbit
    • Jealous people will always think that way

      better to blame someone else for their own shortsightedness
      William Farrel