Microsoft’s New Strategy of Vertical Intergration


Those of you that really like strategy discussions may enjoy this piece from Wharton about Microsoft's move into vertical integration.

Microsoft, well known as a software giant, is increasingly dabbling in hardware and playing a bigger role in product design. The big question is: Why? While some analysts dismiss Microsoft's efforts as Apple envy, experts at Wharton say there is a bigger picture. Microsoft wants more control over integrating its software with the gadgets that could open new markets. Its real mission: Find new vertical markets to dominate so it can continue to grow even if its Windows monopoly erodes.

"Microsoft understands that software, its core business, is becoming increasingly commoditized. It needs to find new revenue streams if it wants to keep growing," says Wharton legal studies and business ethics professor Kevin Werbach. "Across the computer industry, value is moving from the desktop to network-connected services. Integrating software, hardware, content and services, as Apple has done so effectively with the iPod, can be a wonderful business model if you can do it right."

The people are Microsoft are pretty sharp. They know their monopolies are limited, and they are trying to pin down their future. Part of the problem is that Microsoft is so large, rapid growth of any sort becomes difficult. They can't really think about tweaking their business, they need major breakthroughs to get the kind of growth they want.

What they want to do – control the entire product a la Apple – is a pretty difficult thing to execute. Let's not forget that Apple has flopped lots of times. Vertical integration of this sort requires a different kind of skill and focus, and I haven't seen anything (so far) that indicates Microsoft can do that.

What really interested me about the article was this comment:

Given Microsoft's recent activities, it seems clear that the company is anticipating a time when Windows yields to something Whitehouse calls the "webtop." "Microsoft is preparing for the day when it doesn't have control of the dominant software platform," says Whitehouse, who argues that many software applications will one day become subscriber-based services delivered over the web.

I am not a believer in the web operating system. Not for a second. I think things will go in reverse. I think I will store and process all kinds of things locally that I don't today. I think my use of a connection outside of my own PAN will be less on-demand and more asynchronous. I think the PC will go away, replaced by a mobile device that stores all my info. I will set that device down next to a monitor. mouse, keyboard and mass storage device and it will wirelessly connect to everything. That will be my "computer."

Eric Brookman is CEO of a wireless USB hardware company called Alereon. I read his blog because he is an important person in my industry. He recently blogged about Apple going wireless, and we exchanged a few comments about why Apple might beat Dell, Microsoft, and other PC centric companies down the road. Click over and read it if you are interested.

  • David G

    The web can obviously never be the operating system – simply by definition – but that shouldn’t lead you to conclude that the web’s usefulness will diminish.

    The most valuable data isn’t the stuff you already have – it’s the stuff your “loose ties” have. Making those connections and accessing their data will always be more valuable than accessing the data in your personal data store.

    The web is a distribution and connectivity device – its existence is what creates the massive potential demand for mobile devices.

    Where I agree with you is that the browser may slowly loose importance away as devices become net-native and yes, apple’s the device manufacturer that seems to have the best understanding of where CE is headed.

  • Rob

    I agree with you on this. I didn’t mean to imply that the web will diminish in usefulness. I just think the browser in it’s current form will lose importance. ASP models are fine for some things, but I don’t see a day where, for every program I want to use, I have to visit a different web address. And I don’t see a day where my devices won’t function without a connection to the web because their OS is run over the web.

    The connectivity of everything to everything else is only going to increase. Processing power for some complicated things may be remote, but there will always be lots of processing power local too.

  • In general, the trend in the computer industry has been *away* from vertical integration. In the mainframe days, IBM used to assemble the hardware, make many of the integrated circuits going into it, write the operating system, and provide the maintenance for the whole affair. Very profitability if you can pull it off.

    The main argument of vertical integration these days would be in terms of ease of use, and also reliability. Makes sense, for example, for an aircraft autopilot or even an automotive GPS. But there are already people in these markets, and I’m not sure what MS’s competitive advantage would be versus a Honeywell or a Garmin.

    There is arguably no need for an autopilot or GPS maker to provide its own operating system (which should be as basic as possible) but MS is likely to view its competency in that field as a major advantage.

  • Rob

    David F,
    The truth though, is that Microsoft isn’t as competent in embedded operating systems. The many flavors of Windows CE/Mobile/Smartphone don’t have near the market penetration that “big Windows” has.