A Mouse and Keyboard Don’t Make a Hardware Company

7/27/12Follow @ckindel

Microsoft is not, and never will be, a hardware company. Please don’t go off saying “what about Xbox or mice and keyboards?”

Microsoft does not really want to build and sell hardware. Surface is akin to Google’s Nexus; a ‘north star’ product intended to lead OEMs in the right direction.

“With Surface we wanted to make sure that no stone is left unturned, in terms of really showing Windows 8 in its most innovative form. With Windows 8 you can get a tablet and a PC in a single package, and I think Surface probably proves that as well as anything.

“Our goal is not to compete with hardware partners. The bulk of our Windows volume is going to come from our hardware partners.” – Steve Ballmer, Forbes, July 18, 2012

I repeat: Microsoft is not, and never will be, a hardware company.

First, Xbox, while finally turning a profit, is a shining example of how far Microsoft needs to go to truly be excellent at hardware supply chain management. The Red Ring of Death debacle cost the company many billions of dollars and I don’t think they’ve learned their lesson.

I know some of the people who drove the Xbox360 hardware design and supply chain management. They are now war-scarred and seasoned experts. They are the type of people you want working on the next big thing. None of them even knew about Surface until it was announced. Typical Microsoft organizational silos.

Designing and building hardware is easy. That is, easy relative to SELLING hardware. Retail, hardware supply chain management, inventory management, support, etc., are huge endeavors that Microsoft has very little capability for.

If you have not actually tried to build and sell a hardware product you cannot really understand just how challenging it is. The DNA of Microsoft is that of a software company. Zune proved this. The ZuneHD was (and is) a fantastic piece of integrated hardware and software. But Microsoft’s execution in selling it was bush-league.

Second, a tiny, tiny percentage of Microsoft’s profits come from direct sales of products to consumers. Like less than 5 percent. In order for Microsoft to seriously get into the hardware business it would need a model that enabled something close to the +40 percent gross profit margins Apple is seeing from its vertically oriented model. It would take a decade or more of radical change for Microsoft to make such a change, and while Microsoft has demonstrated it can turn the ship (more like a fleet) before, I simply do not think this is a direction it can go.

I do not believe Microsoft will try to compete with Apple on Apple’s terms (vertically integrated, high-margin hardware with up-front payment and a walled garden). I believe Microsoft will try to end-around Apple by continuing with a predominantly horizontal play, enabling annuity revenue streams from connected experiences delivered across all of a user’s devices, regardless of whether they run Windows or not (including Apple’s devices).

We will see more hardware from Microsoft. I still wouldn’t be surprised to see a Microsoft designed and built Windows Phone 8 device this fall. There will be new generations of Xbox hardware too. And mice and keyboards. But these things are but grains of rice in a grain silo.

This post originally appeared on Charlie Kindel’s blog.

Charlie Kindel is an entrepreneur, angel investor, startup mentor, and technology executive who spent 21 years at Microsoft . He is the founder and CEO of BizLogr, a business software startup. Follow @ckindel

By posting a comment, you agree to our terms and conditions.

  • Walt French

    “The ZuneHD was (and is) a fantastic piece of integrated hardware and software.”
    And yet, some of Zune’s innovative features helped to distract customers from what it could do for them. Microsoft did itself no favors by picking a weird color scheme for the original Zune, branding the product as a nerd’s toy; to your point about product management, you had to be following Microsoft rather closely before you could recognize that the HD model didn’t look similarly hideous. That would’ve taken many, many millions of ad dollars, dollars that the company wasn’t prepared to spend.

    Even more so, the Squirt. That might’ve been a great feature once the Zune line got past 10% market share. But when first introduced, it merely highlighted how the Zune brand was on the wrong side of the network effects curve.

    Hardware and software are fun in their own right — I personally enjoy playing with algorithms and gadgets that are utterly uncommercial. But Microsoft doesn’t exist to entertain its engineers; it is charged with building products that will help its customers be more productive and/or enjoy themselves.

    Technologically nifty as the ZuneHD may have been, and the Surface appears to be, calling them “fantastic” necessarily demands that they serve the purpose for which they were intended. I don’t think that plays out. Of course, this is just a single example, and every other firm has its failures. But the ZuneHD met almost nobody’s needs.

    Instead, the Zune experience solidified Apple’s hold on the Kewl Factor, and marked Microsoft customers as dorks. The Surface, thrown out as a Swiss Army knife of devices, risks the identical consequence. Rather than worry about the profits that come from vertical integration, Microsoft should focus on the customer satisfaction from building a product that does some valuable function, better than any other devices.