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Microsoft Just Declared War on Its Hardware Partners

"[We're] not interested in competing with our OEMs when it comes to hardware," Microsoft  (NASDAQ: MSFT  ) CEO Satya Nadella insisted on Tuesday.

Interested or not, that's exactly what the Windows maker is doing: If Microsoft's new Surface succeeds, it will come at the expense of other Windows-powered devices, the vast majority of which are still made by the company's hardware partners, including Hewlett-Packard (NYSE: HPQ  ) .

Microsoft's entrance into the hardware arena has already strained its relationship with its original equipment manufacturers, and the Surface Pro 3 could prove devastating.

The most impressive Surface yet
With the Surface and Windows 8, Microsoft has been attempting to execute on a simple vision: create a single device that satisfies all of a user's computing needs. Buying both a tablet and a laptop can be expensive, and toting them around can be a hassle. With the Surface, Microsoft is offering a product that can do it all -- at least in theory.

In practice, that's hardly been the case. The Surface RT and Surface 2 are well-equipped and competitively priced, but cannot run software written for traditional PCs. The Surface Pro and Surface Pro 2 can run nearly any application, but they are much thicker and heavier than true tablets. And all Surfaces, Pro or not, have shipped with 10.6-inch screens -- too small to accomplish any real work.

The Surface Pro 3, unveiled Tuesday, is an impressive device that fixes virtually all of the problems with prior Surface models -- it's both thin and light, with a 12-inch, high-definition display and a speedy processor capable of handling most tasks. It's not perfect, but it may be the first tablet truly capable of doubling as a laptop.

Microsoft's Ultrabook killer
That could be a problem for Microsoft's hardware partners. With a base price of $930 ($799 for the Surface Pro 3, $130 for the keyboard cover), it will appeal mostly to potential buyers of higher-end, Windows-powered Ultrabooks.

That isn't to say that it couldn't also weigh on tablet sales -- owners of the Surface Pro 3 would have little reason to purchase an iPad or an Android-powered slate. But someone in the market for a $299 iPad Mini or an even cheaper Android tablet likely won't have much interest in the far more expensive Surface Pro.

Hewlett-Packard considers Microsoft a competitor
Rather, the Surface Pro 3 is likely to cannibalize sales of other Windows machines, including those sold by Hewlett-Packard. Last year, HP CEO Meg Whitman went so far as to declare Microsoft a "competitor," and she has been striving to limit Hewlett-Packard's dependence on Microsoft's operating system.

Rather than focus solely on Windows machines, as it did for many years, Hewlett-Packard has begun to aggressively embrace Android and Chrome OS, releasing a wide variety of machines in different form factors that compete directly with Microsoft's platform.

Hewlett-Packard isn't alone -- virtually all of Microsoft's hardware partners have embraced Android and Chrome, much to the chagrin of the Redmond-based tech giant, which has waged an aggressive PR campaign against these rival operating systems. To some extent, this could be a reaction to changing market conditions -- consumers may simply prefer these rival operating systems. But it's hard to discount the discontent displayed by Microsoft's partners: Acer's CEO, after the original Surface's unveiling, warned that it would create a "huge negative impact for the ecosystem."

When Hewlett-Packard sells a Windows-powered laptop, it pays Microsoft a royalty. In years past, that may have been fine -- Hewlett-Packard was on an even playing field, competing only with other OEMs. Today, however, Microsoft is taking that money and funneling it into the production, distribution, and advertising of products, including the Surface Pro 3, that compete head-to-head with (and thus limit the success of) Hewlett-Packard's machines.

A Pyrrhic victory
The Surface Pro 3 is an impressive computer, one that truly embodies Microsoft's vision of a hybrid device. If consumers can get over its admittedly steep asking price, Microsoft could finally have a successful Surface on its hands.

But at what cost? Hewlett-Packard and Microsoft's other hardware partners have already begun to move away from the Windows platform, promoting rival operating systems at the expense of Windows. The Surface Pro 3 is an even greater threat to these companies, standing as a legitimate alternative to their Windows-powered machines.

Microsoft believes the Surface Pro 3 will save the Windows ecosystem. But it could just as easily destroy it.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 22, 2014, at 2:52 AM, ramsamba wrote:

    If HP produces a Linux distro (HP Linux?), maybe with backing of Ubuntu and Linux Mint, and supports it with passion, there will be a good chance for many big companies who are looking to switch to Linux through support from a big-time company to sign-up for HP Linux.

    HP gets to sell more computers, get support subscriptions (like red hat does) for desktops, and also build a reputation as a Linux company on the server side with microservers, etc.

    If the city of Munich could be successful with LiMux (and I know HP came up with a crappy report on that, probably at MS' behest) then there is an opportunity for HP to build this business.

    By HP doing this, the hardware and support side of the Linux equation gets evened out. For companies who want MS Office on their PCs, HP could ensure that MS Office on PlayOnLinux works; personally I have had success with this (but on some hardware it didn't work)

    Yes, it may be a slow growth thingy, but every big thing today started off slowly with naysayers all around. Many companies (and China) are hurting today because MS has refused to support XP any longer and are looking for long-term without having to reinvest in hardware. Linux works even on extremely old hardware today. It's a no-brainer for those with brains.

    Linux became popular after IBM's USD2billion support way back in the early 2000s which has done a lot for Linux's success today at the back end. Companies pricked up the ears upon hearing IBM's involvement.

    Backing from the big boys makes a lot of difference. Same for the big girls too...Meg? You listening?

  • Report this Comment On May 22, 2014, at 9:21 AM, Drichter wrote:

    It's hardly surprising. OEMs were doing a decent job of providing computers for the low-end market, which the Surface Pro models don't interfere with in the slightest.

    On the other hand they've done a pretty poor job of catering to the high-end overall, where Apple is performing quite well recently. And have you seen the hybrids those OEMs offer? Out of the whole lot, none are designed quite like the Surface series.

    Who can blame Microsoft for stepping up when OEMs were steadily losing ground year after year?

  • Report this Comment On May 22, 2014, at 12:18 PM, bobbyedwards wrote:

    The Fool and a number of others said the same thing when they signed the first deal with Nokia. Then when they announced they were buying Nokia, the media all said the OEM's would leave, instead just like the Mini Surface, the media was wrong. Microsoft has added a number of new OEM partners to Windows Phone, including two more just a week ago, and now has 17 WP OEM partners. What difference does it make to an OEM if Surface is made by Microsoft or Samsung, each one has the same goal, make a better product and beat them in the sales arena.

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Sam Mattera

Sam has a love of all things finance. He writes about tech stocks and consumer goods.

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