Microsoft and the Rise of Hardware Walled Gardens

The recipe that won Microsoft its once-dominant stance in the market is not the recipe that will again make the company relevant.

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David McNew / Reuters

New Surface tablet computers with keyboards are displayed at its unveiling by Microsoft in Los Angeles, California, June 18, 2012.

As I study the industry, the market trends, and the solutions trying to flow with the trends, I’m fascinated by what Microsoft is doing strategically. From a historical standpoint, we have to conclude that the Microsoft of old is drastically different from the Microsoft of new. The recipe that won Microsoft its once-dominant stance in the market is not the recipe that will again make the company relevant. (Note I didn’t say dominant, as I have a hard time making the case that any company will truly dominate the market as Microsoft once did.)

We are seeing this shift as Microsoft gets more active in the hardware space with products like Surface and its acquisition of Nokia. We are watching Microsoft abandon nearly all the strategies that made it successful and embrace new ones in the hope of a future. A quick survey of the hardware landscape brings this to light.

Hardware Walled Gardens

What we are seeing is the emergence of hardware walled gardens. Take Surface, for example. The Surface–and even more so with Surface 2– was designed with an experience that is based on proprietary hardware accessories. Many of the new accessories, most notably the snap-on keyboards, work only with the proprietary port built into the Surface’s hardware.

What’s interesting about this is that it’s somewhat counter to how the industry rallied around Windows to begin with. Microsoft’s success up to this point was built around the idea of compatible hardware and accessories that tied into the Microsoft ecosystem. A customer knew that if they purchased a desktop or notebook from a Windows vendor that many, if not all, of their ports were compatible with third-party accessories. We may be moving away from this model.

A quick glance at nearly every other hardware partner of Microsoft’s and we see the same picture emerging. Nearly all of them are building hardware specifically tied to proprietary ports using proprietary accessories for a specific value proposition. So what has changed that is causing this shift? The answer is differentiation.

During the era of compatible hardware, there was nowhere near the need to differentiate like there is today in the broad consumer landscape. When most PC users were being supplied with computers by their employers, it was their employers who made the buying decision and did so in bulk largely based on price. Once a pure consumer market emerged–somewhere in the mid 2000s–we saw a more clear demand from consumers to differentiate, and hardware companies were forced to think of new differentiation strategies in order to compete.

In essence, this is the challenge of a hardware company that ships the same software as its competitors. Hardware becomes the only real differentiation point, and maintaining loyal hardware customers becomes even more challenging. 

So enters the era of hardware walled gardens. Companies like Microsoft, Dell, Acer, Lenovo, Samsung, Sony, HP and others hope to generate more hardware-loyal customers by locking them into a proprietary hardware ecosystem. This is out of necessity because they simply can’t do so with a proprietary software ecosystem like Apple can.

Glimmers of Hope

I don’t necessarily think this is a bad thing. I simply make the point that it is different from what we have seen historically from Microsoft and its partners.

This trend certainly lines up with the BYOD (bring your own device) stance of many corporations today: Consumers may choose the best hardware ecosystem to meet their needs at both home and work. But based on the understanding of differentiation I outlined above, it’s fascinating to think that PC companies may be evolving into accessories companies. What I mean by that is that their “box” strategy is really more of a means to an end: their accessories strategy, where the real money may be.

Now, if we use this line of thinking, then the Surface makes perfect sense. While Microsoft has never had a true PC hardware business, the company has had an accessories business for quite some time. So perhaps the Surface is more an accessories strategy than a box strategy. Whether it is or not, Microsoft’s partners will follow suit.

We are at the very beginning of this shift. I’ve been making the case that hardware companies will be continually challenged if all they are is hardware companies, but by adding the proprietary hardware walled garden angle into the mix, things can get even more interesting. Perhaps hardware companies that think about their hardware walled garden may not only continue to differentiate, but may also be able to layer web or software services onto that differentiation.

Again, we are very early in this hardware walled garden trend. However, over the next 12 months, it will be very interesting to watch what happens relative to Microsoft, its ecosystem and its partners.

Bajarin is a principal at Creative Strategies Inc., a technology industry analysis and market intelligence firm in Silicon Valley. He contributes to the Big Picture opinion column that appears here every week on TIME Tech.