When computer maker Acer looked at its future, it didn't like what it saw. Now that Microsoft
Microsoft should see this criticism as a sign that its hardware push was the right one, whereas hardware makers should prepare for a rougher future where they'll need to dramatically change tactics to survive.
Vertical integration, or, not depending on anyone
A business can place itself anywhere along the product-creation line, from mining the minerals required to make a product to selling the product to the customer. Typically, certain businesses develop competitive advantages by operating in one specialty. For example, while an agriculture company will be the best at producing cotton, a designer will be the best at marketing that cotton, while a manufacturer will be the best at turning that cotton into clothing, and a retailer the best at selling that clothing to the customer.
If a company believes it can do better if it owns more than one of the steps that a product takes, it can "vertically integrate," and move up the supply chain to become its own supplier, or down to become its own vendor. This move can help it cut costs, control quality, and decrease reliance on other companies.
A company like Dell
Unfortunately for Dell and HP, consumers aren't buying their products. In second-quarter estimates according to Gartner, U.S. PC shipments for HP fell almost 13% while Dell's fell 9.5%. Apple's, on the other hand, gained 4.3% versus an overall 5.7% decline in shipments for the industry.
Microsoft, recognizing this sales slump, now wants to try its own hand at producing a product along with its software. And Acer recognizes that Microsoft is encroaching on its territory. Microsoft, to have a chance, realizes that it must have more control over the hardware. And despite what Acer says, Microsoft has arguably proved itself in hardware with its Xbox game consoles that brought in more than $1.2 billion in operating profit in 2011 (unfortunately, the division the Xbox falls under is lumped together with payments to Nokia in 2012). And even if Microsoft fails at a tablet, it has enough cash to fail for a while, so hardware makers should be ready for a significant change in its relationship with Microsoft. Like Netflix is squeezed between content providers for supply and Internet providers for distribution, hardware companies could be squeezed by less power over suppliers and less demand from customers.
Plenty of operating systems in the sea?
What can hardware makers do? HP made a feeble attempt at launching its own mobile operating system on its TouchPad tablet, but that experience has probably discouraged others from doing the same on either mobile or desktop systems. That's OK, though, as Google
Otherwise, Microsoft will build hardware that better integrates with the operating software, and companies like Dell will suffer. Less desirable products will lead to lower prices, and that would cut into already small profit margins.
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Fool contributor Dan Newman holds no position in any of the above companies. Follow him on Twitter, @TMFHelloNewman. The Motley Fool owns shares of Best Buy, Apple, Intel, Microsoft, and Google. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, Intel, and Google and creating bull call spread positions in Microsoft and Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.