Should Microsoft be a PC hardware company?

The PC market is troubled. Sales are stagnant at best. And while some businesses are upgrading their devices, many consumers don’t seem to be.

In this market framework, Microsoft has made waves by releasing a higher-end notebook PC (Surface Book), setting it on a course to compete with its many key OEMs (e.g., Dell, HP, Lenovo, Acer, Asus, Samsung, LG). Is this a bad idea in a currently slumping market for PCs in general?

While many see this as a troubling competitive strategy suggesting Microsoft is engaging in channel conflict with its OEMs, I see it differently. By its actions, Microsoft is actually helping to reinvigorate a moribund PC market, despite the decidedly mixed reviews of the Surface Book. The fundamental question is, can Microsoft create a better PC?

The issue is not whether they can make a perfect device. Surface Pro and Surface Book are not perfect implementations of notebooks or 2 in 1 devices. The more important issue is, can Microsoft create design leadership and thought leadership of what a PC can be and therefore influence a market that seems dormant? The level of innovation has mostly been stagnant for several years, which is why sales have been slipping.

Indeed, it seems most PC makers have undertaken a “race to the bottom” to hit increasingly low (and compromised device) price points. Even Intel’s influence on new products with its emphasis on Ultrabooks and hybrid computing solutions has not achieved anywhere near the success it should have. The initial innovation was not compelling and consumers responded accordingly.

And yes, there was competition from smartphones and tablets, but this doesn’t fully explain the slump in PC sales alone. Nor does the initial fiasco with Windows 8.

There’s more to it than that. You need to provide a reason to upgrade, and not just because of a new OS, although Windows 10 gets Microsoft back on the side of OSes people actually like.

Microsoft’s foray into the market with compelling products was at first seen as directly competing with the existing OEM base. But I would argue that rather than negatively affect them, it spurred them to action to outcompete Microsoft within the target markets Microsoft was addressing (the higher end of the PC market, especially the business market).

It will ultimately help in the consumer space as well. Microsoft showed that there is a market for higher performance, compelling devices at significantly higher price points than "what’s on sale this week" at retailers. Indeed, Apple has known this for some time and is expert at taking advantage of this buying group.

Microsoft’s attempts to built “halo” products is much the same strategy Google has used successfully with the Nexus line of smartphones and tablets. Google is not looking to put OEMs out of business. Rather, it is showing what can be done by pushing at some of the design limits and current levels of innovation (or lack thereof). 

Further, by delivering its own products, Google gets direct feedback from customers about the features they like and dislike, as well as how the devices are used. This strategy will offer Microsoft the same benefits.

And Microsoft’s new strategy has already shown results. Last CES was full of examples of OEMs trying to out-compete Microsoft in the target markets of Surface Pro and Surface Book. They showed some compelling new products that garnered a great deal of excitement. Examples of this are the recent launches of new HP EliteBooks and Dell Latitude/XPS devices.

But Microsoft is not omnipotent and can only do so much to stimulate markets. Microsoft has been trying a similar strategy in the smartphone space, having purchased the Nokia phone business (which it admits has largely been a failure). It has been trying to get the Windows phone market invigorated, with some key Lumia smartphones.

But unlike in the PC space where Microsoft controls the vast majority of the market and its PC efforts have a huge base to attack, the market for Windows phone is miniscule (under 2%). As I’ve indicated previously, I don’t believe Microsoft can successfully increase this share given the overwhelming dominance of Android and iOS. But it can generate significant revenues in cross-platform apps and services even if its Windows phone hardware business is a lost cause. And it generates far greater revenues with IP licensing from virtually all Android devices than it is making on Windows-powered phone sales.

So should Microsoft remain in the hardware business? I’d recommend that Microsoft continue to make PC hardware, but only to the extent that it can produce truly innovative products that push the leading edge of the market. Selling several million of its own units is fine, but pushing the market to be more competitive and to innovate so that customers start buying PC devices again will ultimately benefit Microsoft and its total ecosystem greatly.

And that’s why Microsoft should continue as a PC hardware company.