The New Face of the PC Industry

Over the past 30 years, the PC industry has always operated around a basic principle: Microsoft creates and licenses an operating system (Windows) to all OEMs and they manufacture hardware that runs it. This marriage between Microsoft and its hardware partners has been very successful and it has driven the industry engine of growth this entire time.

But all that changed recently when Microsoft jumped into the hardware business by unveiling its new .Overnight, the PC universe was shaken up. For the first time, Microsoft is now competing directly with its OEMs and .

Then last week, Google joined Microsoft by introducing its own tablet, the , and Google also extended its role as a hardware vendor competing with its own customers.

Microsoft and Google have both come to realize that Apple's model of vertical integration—in which the vendor owns the hardware, software, and services—is the most effective model for creating products for consumers.

When Microsoft and its OEMs only had to deal with business and SMB customers, the open model worked. Things are different in the consumer markets, however, mainly because consumers are much pickier. In this case, innovation in technology is what drives their interest.

What this really translates to is the fact that Microsoft could no longer trust its OEMs to innovate around Windows. It felt it had to take matters into its own hands by owning the software and the hardware. It can now build and innovate around a product it has total control over.

Likewise, Google's move into hardware shows doubt in the ability of its hardware partners to build around Android. Its will only strengthen its move into vertical integration.

But for both Microsoft and Google, this move is very risky. It has angered their hardware partners, which feel threatened by the companies' decisions to become hardware vendors.

It appears that Microsoft and Google took calculated risks in doing this and pretty much have decided that vertical integration is the only way for them to control their destinies. In both cases, however, it comes off as an act of desperation. Both are reeling from Apple's continuous growth at their expense. While Google has made great strides in smartphones, it has done poorly with tablets. Microsoft's partners have not shown that they can innovate fast enough to help Microsoft gain ground on Apple.

Nevertheless, the fact that Microsoft and Google are now hardware vendors changes the industry forever. Vertical integration will become more important for both companies as they try to fight off Apple in the consumer marketplace. I expect that we will see more products under their brands in the near future.