Could it be that the most interesting battle in technology is
), but rather
) versus its long-standing hardware partners?
Yesterday at the company's analyst meeting,
) CEO Meg Whitman acknowledged the growing heat with Microsoft,
saying, "Current, long-term HP partners, like
) and Microsoft, are increasingly becoming outright competitors."
Now the idea of partners being rivals isn't exactly new for the
technology industry, particularly when it comes to mobile.
For example, Apple and
(OTCMKTS:SSNLF) have quite a nasty rivalry in smartphones. Yet
Apple is a major buyer of Samsung chips. And Google, under its own
name and its Motorola unit, produces Android-powered smartphones
and tablets that compete with models from hardware partners like
(TPE:2498) and Samsung. Heck, Google even uses
(KRX:066570) (a key Android smartphone player) to produce its Nexus
Microsoft has been embracing the concept of competing with hardware
partners for some time.
For example, its Surface tablets directly compete with models from
(DELL), and its recently announced acquisition of
made it clear that it's more or less going it alone in smartphones.
And we can even go back to products like the Zune music player and
for earlier examples of Microsoft's attempts to emulate Apple's
Why is Microsoft going it alone?
Simple -- it wants the whole enchilada.
Let's focus on smartphones for a minute.
We learned something utterly fascinating when Microsoft announced
that Nokia deal. For each Windows Phone unit sold, Microsoft earned
a gross profit of less than $10.
As I have explained, this was unsustainable
As of April 2013, Gartner forecast global smartphone shipments
of 1 billion in 2013. At 3.3% of the market with a $10 per unit
(rounding it to $10 to keep it simple) gross profit, Microsoft
could be expected to generate $330 million in gross profit from
Windows Phone royalties this calendar year.
Heck, bump the market share number up to 5% and it still does not
come remotely close to moving the needle, as Microsoft had $14.3
billion in gross profit last quarter. When factoring marketing and
development costs into the equation, Windows Phone almost certainly
Can the financial situation be much different in tablets?
And look at what's happening in the PC market.
Gartner said yesterday that PC sales dropped 8.6% in the third
quarter, a record sixth straight quarter of decline, and the worst
quarterly volume number seen since 2008.
The best way to offset this weakness is to bet on the burgeoning
tablet market that is hitting PCs.
Think about the iPad. A 2012 court filing showed that Apple's gross
margins on the iPad were in the range of 23-32%, meaning that the
company squeezed out something in the neighborhood of $100-$140 per
iPhone margins are even higher at 49-58%, meaning that gross profit
per unit is in the $300+ range.
Now Microsoft does not have Apple's brand prestige, but it's
obvious that it can do better than $10 per unit if it goes it alone
in hardware. It forecast $40 per unit on a Windows Phone with the
And let's face reality: Microsoft can afford to tick off partners
like Hewlett-Packard and Dell, who have no doubt seen this coming.
Both have experimented with other operating systems like Android,
and in Hewlett-Packard's case,
it bought Palm to gets its hands on WebOS.
The big Windows PC manufacturers can't abandon the OS without
giving up a ton of revenue, and frankly, Microsoft wouldn't be hurt
much by a big partner leaving.
Why? Because Windows PCs are commoditized and largely made by
contract manufacturers -- the slack would be picked up immediately
by the remaining brands.
GE Joins Forces With Cisco, Intel, and AT&T for
'Industrial Internet' Revolution
Google Chromebooks Are Deadlier to PCs Than
Is Apple Wasting Its Time With the iWatch?