Software biz tapping hardware to give better experience

Venturing into consumer hardware, especially smartphones and tablets, is increasingly becoming a differentiator for software companies to gain an edge. However, analysts emphasize the key is not standalone design or form, but having hardware as a seamless part of an ecosystem of content and services in delivering a superior user experience.

Stephen Baker, vice president of industry analysis at The NPD Group, said hardware is increasingly a key part of a platform vendor's strategy to lock consumers into their content and device ecosystem.

Hardware and software work best when they work together, and by controlling more of the hardware along with the software, the consumer gets a better experience. So, what vendors are doing is differentiating on the entire ecosystem, and hardware has to be a part of that, he explained.

"Good hardware is only as good as the content it has access to or its ability to draw someone into the ecosystem. Hardware does not have to be uniquely differentiated, what has to be uniquely differentiated is the entire experience," Baker added.

Ben Bajarin, director of consumer technology at research firm Creative Strategies, said consumer expectations have matured alongside advancements in personal computing and electronics industry, which has since realized that consumers "don't just want the cheapest thing out there".

Looking ahead, Bajarin predicted that companies will continue investing more in proprietary differentiating software, as well as tie software and hardware to their cloud services. "Hardware plays a key part [in all this], but not the central role since it is merely a way to provide consumers and business a pathway to core offerings," he pointed out.

Their comments come amid a recent slew of gadget offerings by companies whose core businesses are not in hardware. For example, software stalwart Microsoft on Jun. 18 revealed its Surface tablets. Web titan Google unveiled its first tablet called Nexus 7 on Jun. 27, adding to its Nexus family of smartphones. E-commerce giant and Kindle creator Amazon is building a smartphone, as is social networking juggernaut Facebook, according to reports.

Don't stake all on hardware
There is no doubt consumer hardware is now a big differentiator for technology companies, but Ajay Sunder, senior director of ICT practice for Asia-Pacific at Frost & Sullivan, also emphasized: "Like how it was the iTunes Store, and not the iPod, that differentiated Cupertino against existing alternatives of the time, consumers are only open and willing to pay premiums for hardware that enhances the user experience."

With the success of its iPods, iPhones and iPads, Apple has forced other companies to look at consumer hardware as an area of innovation, he said.

Other observers stressed that Cupertino's success with consumer hardware is more exception than rule.

"It does not change the fact that hardware is a commodity and difficult to differentiate on," said Baker. "Volume hardware will always have lousy margins and the manufacturer will almost always be dependent on the services or the distributor to add value to their device," he added.

Michael Yoshikami, CEO and founder of investment consultancy Destination Wealth Management that works with tech clients, concurred, adding that focusing on hardware design and differentiation may be applicable for Apple, but for other companies to "live or die by their hardware offerings is simply not the case".

The margins for consumer software remain far greater with significant economies of scale, whereas in hardware, overhead and cost of raw materials eat into margins, he explained. Furthermore, all consumer hardware eventually becomes a commodity except that which differentiates itself with a value-add proposition.

"Even for Apple, which has very high margins on hardware, we'll see in all likelihood reduced margins in the long-term, though they will be able to maintain higher profit levels because of the ecosystem of their app store," Yoshikami said.

Sunder, however, argued that at least for the next few years, innovations will continue on consumer hardware before it gets commoditized, given the "exciting range of products" in the pipeline such as Internet-enabled eyeglasses.