The moral hazard of Microsoft-branded PCs

Ed Bott asked a few days ago whether Microsoft should get into the PC hardware business. The question is clearly driven by the recent success of Apple computer.
Written by John Carroll, Contributor

Ed Bott asked a few days ago whether Microsoft should get into the PC hardware business. The question is clearly driven by the recent success of Apple computer. Because Apple makes both the hardware and most of the software that runs on it (at least, out of the box), they can ensure a certain level of consistency that isn't present to the same degree in Windows.

A personal anecdote: as noted in a past post, I recently bought a MacBook Pro to complement my collection of Windows PCs. Every new MacBook comes with an integrated camera and microphone. The same applies to many Windows-based laptops, but what is interesting about the MacBook is how Apple has ensured that things just work when I fire up PhotoBooth to do a quick video recording. On my Windows PC, I've had a heck of a time achieving the right lighting and audio balance. On the MacBook Pro, it just worked.

Apple's control of Mac hardware and software has made it a lot easier to ensure everything works seamlessly. This is harder to achieve when you have the "open bazaar" approach that exists in Windows (an approach that has is more comparable to Linux than to Apple). And then, of course, there is profit. Apple charges a premium for its products, and all that profit flows directly into Apple bank accounts.

More consistency and higher profits are both concepts that likely appeal to Microsoft. On the other hand, it's worth remembering that the third-party licensing model was the eventual winner in the computer wars. There's certainly more variety in the Windows-oriented majority of the market, and the cost advantages eventually drew Apple from their hardware island onto an Intel platform.

Personally, I think it would be a decent idea for Microsoft to get into PC hardware, though there is moral hazard down that path. I particularly like the idea regarding a reference design put forward by Bott. It allows Microsoft to create designs that might "lead by example," to a certain extent, without tempting Microsoft to turn PC hardware into a self-sustaining Microsoft business.

It's in the nature of corporations to try to grow revenue from all of its operations. If Microsoft's PC business started to gain real legs, I could see Microsoft wanting to start keeping some market differentiating toys to itself.

That, I think, would do real damage to the central core of Microsoft's business, which is leveraging the innovations of third-party OEMs as a means by which to drive down hardware costs while at the same time providing customers more variety. Repeating myself to make the point clearer:  the multiple hardware OEM model was the driving force behind cost reductions in the PC hardware industry, something Apple's model, which lacked PC-levels of competition, would never have been able to achieve. That's what attracted Apple to the same hardware that drives the Windows universe (though that is unlikely to end up in an Apple ad campaign).

It is worth noting, however, that Microsoft has managed to compete head-on with certain hardware competitors without trying to foreclose opportunities. The Microsoft Hardware division makes Microsoft-branded keyboard, video cameras and mice (among other things), and yet companies like Logitech have strong businesses that compete with them. If anything, Microsoft hardware helps to lead the market in new directions. Logitech is usually up to the challenge and aims to "one-up" the latest offering from Microsoft hardware. It's a useful tennis match that has improved the quality of hardware peripherals designed for Windows.

If Microsoft could achieve the same kind of feedback loop in a Microsoft-branded PC hardware division, that would be a good thing. It's just more imperative, however, than in peripherals hardware that Microsoft avoids temptations to keep certain platform-oriented tools to itself. Microsoft PC hardware, were it ever to exist, should aim to license every piece of itself to third parties. The aim should be to encourage third parties to make their own products better, thus making it easier for them to sell more licenses of Windows. Though I think a Microsoft PC hardware division would be profitable, its profits should never be as important to Microsoft as growing the wider market for its platform software.

Microsoft, in other words, needs to learn from Apple's design excellence and attention to non-technical consumers. Making their own hardware might help them to do that. They don't need to copy Apple's business model, however.

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