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Microsoft hides US$43 billion Apple-esque business in plain sight

Gregg Keizer | Oct. 13, 2015
'More Personal Computing' unit, combining devices and software and services, serves critical strategic purpose.

That's Apple's model, and it's an extremely profitable one.

microsoft surface book

Microsoft made it clear that it sees its hardware line as competition for Apple in the premium-price sector. Surface and device chief Panos Panay called out the MacBook Air when he touted the Surface Pro 4 -- something he has done since 2012 -- but added the MacBook Pro, Apple's top-tier laptop, when he contrasted it with the Surface Book.

Panay was even clearer in a recent interview with The Verge. "Of course we're competing with Apple," Panay said. "Making premium devices and reinventing categories, that essentially puts us in a camp to fundamentally compete with Apple devices."

Analysts, too, were taken with what they saw as a renewed rivalry, at least on Microsoft's part. "They positioned everything as [compared to] Apple," said Bob O'Donnell, chief analyst at Technalysis Research, in a Tech.pinion's podcast on Saturday with Tim Bajarin of Creative Strategies and Jan Dawson of Jackdaw Research. "This was clearly back to the old days of Microsoft versus Apple."

Apple's strategy, and now Microsoft's too, is to cater to the top end of the market where prices are highest, and virtually all profits are earned. While small in absolute volume -- Apple shipped fewer than eight of every 100 personal computers in the latest quarter, IDC has said -- premium vacuums up an overwhelming majority of the PC industry's profits. The bulk of devices are now sold at razor-thin margins because OEMs have raced to the bottom to maintain unit shipment volumes, and thus "trained" most customers to expect low-priced hardware.

Analysts, however, looked for more behind Microsoft's hardware press, a strategy initiated by former CEO Steve Ballmer, seemingly dismissed by current chief executive Satya Nadella, but now one he has apparently embraced.

Bajarin, who joined O'Donnell and Dawson on the Tech.pinions' podcast, had an idea why Microsoft was pouring such effort into devices, especially the $1,500-and-up Surface Book. "In many ways, Microsoft is taking a stronger hardware position to be somewhat defensive, because if they start losing key partners, they have to do it themselves to continue to populate and propagate the Windows strategy that they have," Bajarin said.

Bajarin had expanded on that concept in an analysis posted to Tech.pinions Friday.

"With the PC industry contracting ... only the big players will probably have the staying power to keep their PC business alive," Bajarin wrote. "Companies like Toshiba, Acer and Asus could have trouble competing against the big guys as they see their margins shrink and their own bottom lines strain. If this happens, it will be an issue for Microsoft as their OEM customer base would also shrink."


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