It requires a certain critical mass for me to emit a blog post. Yesterday's unveiling of the Microsoft Surface devices has prompted copious product commentary, but I think the big story has little to do with speeds and feeds, or competition with Apple.
The Surface announcement is the best demonstration of the systemic weakness of the Wintel ecosystem, ever. While multiple sources of pressure have been building to strain this long-standing duopoly, Microsoft's decision to manufacture its own tablet device may well push the water over the edge of the dam.
In addition, as a Microsoft shareholder, I'm concerned about the impact of this announcement on the company's overall performance. More on that later.
First, the industry impact. If we set the wayback machine far enough, we can go back to a time when personal computer manufacturers actually added substantial value beyond the semiconductor components supplied by Intel and its competitors.
A company called Compaq, for instance, distinguished itself in the business market by spending significantly on R&D to make Intel-based hardware reliable and serviceable enough to be taken seriously by enterprise customers. They were able to charge a premium for their work.
Compaq's competitors, like Dell, were happier to take Intel reference designs, which were not quite as robust, bend some metal around them, and compete on price. Intel and Dell responded by labeling Compaq solutions "proprietary" and simultaneously adding features into their reference designs, reducing their value to commodity levels. Dell and its ilk won.
Intel was also working hard to migrate more and more value of a PC into its chips. They were fairly successful at this, ultimately capturing most of the value in a PC and leaving table scraps of margin for their OEM partners. Years ago I imagined that Intel might just go ahead and put the OEMs out of their misery, but it dawned on me that Intel was brilliant in outsourcing the misery - why would they want it?
The other winner at the head of the PC food chain was, of course, Microsoft. They basically collected a tax on every Intel-based unit sold by every company except Apple. Life was good in Redmond.
Meanwhile, at the end of the value chain. PC companies were fighting over increasingly smaller scraps. The shakeout killed Micron, Gateway, and, ultimately, Compaq. IBM had the good sense to see the handwriting on the wall and rebuild its company around services. Now HP and Dell are trying to catch up.
Meanwhile, Wintel-based product design has suffered from a combination of consumer malaise and OEM fear, resulting in underspending in R&D. Above the chip level, Intel has maintained a leisurely R&D pace, with the ultrabook reference design a recent example. But, as we all know, Apple spoiled the party by creating a new category and nailing it with the iPad and its app ecosystem. Android tablets piled on. Wintel OEM response has been ham-fisted at best, partially because neither Intel nor Microsoft was ready with a fast response.
But Wintel OEMs are also fighting for their survival, are being pulled in multiple directions from external and internal forces, and are shedding resources like clothing on a hot day. Microsoft must have felt that, left to their own devices, it would take so long for OEM partners to come around that it would be impossible to play catchup.
In addition, Microsoft could do the same bill of material arithmetic everyone else was doing and conclude that, for some devices, ARM had a place and an Intel premium was not worth paying.
The result - Microsoft takes matters into its own hands. It uses an ARM processor to compete on price, and an Intel processor to ride its Office monopoly. These are not dumb moves.
But, Microsoft has hit its OEM partners squarely in the face. This is not a Zune. nor is it a Microsoft mouse, each of which could have complemented an OEM product. If successful, Surface devices will take lots of dollars away from mainstream OEM products.
Intel probably views the ARM-based Surface as a minor annoyance. They have seen Microsoft move to other processor architectures before (NT on Alpha, anyone?), and know they can usually play the long game and win business back.
But the PC OEMs are a different story. I'd hate to be at HP while I watch the last vestiges of any proprietary advantage in tablets with WebOS walk out the door. I'd like to think that Google might use this event as a reason to really woo PC OEMs with a non-balkanized version of Android, but I'm not holding my breath. Besides, Google would have to come up with a unified Android app marketplace that OEMs could white label, and share revenue. That could happen. And pigs could also fly.
It's no sure thing that Microsoft will make Surface work. But let's suppose they do. As a MSFT shareholder, I can therefore look forward to some increased revenue, and lower gross margins as hardware gross margins become a more significant part of the Microsoft product mix. And I'm wondering, why in heck isn't there a new arms-length company being formed to do this, so margins aren't diluted across the enterprise? Intel continues to outsource value chain misery, and here is Microsoft jumping to take it on.
For an outside observer, the new array of moving pieces created by this announcement is awe-inspiring in its complexity and unpredictability. The Surface announcement party may be over, but the real fun in Wintel-land is just beginning.