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

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.
Written by David Morgenstern, Contributor

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.  

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