Component Manufacturers

Microsoft Surface Tablets: A Core Strategic Change For Microsoft.

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Yesterday, in a much-hyped announcement, Microsoft unveiled its future tablet offerings — both an ARM and an Intel-based 10.6-inch tablet running their respective flavours of Windows 8.

While no pricing details have been announced, these aren’t budget devices: they are likely to be on par with premium Android tablets ($500) and the iPad ($650) for the ARM-based device and approaching Ultrabook prices ($700 to $1000) for the Intel-based tablet. I’ve written previously about how the tablet war wouldn’t really kick off until Microsoft arrived, so what can we draw from these initial announcements?

  • The Intel tablet will clearly be targeted at business, at least initially. Microsoft has been running interference over the past two years around businesses adopting iPads as core employee devices. When the Intel-based Surface ships (probably early 2013), it will at last have a proper solution for its big enterprise customers — and one that it can supply directly rather than relying on the vagaries of OEM support. Given a reasonable price point, proven compatibility with legacy Windows applications, and robust security and remote management abilities, I would envisage high levels of interest in the product.
  • Ouch! Talk about kicking OEMs when they are down. Dell, HP, and Acer are all reporting poor financials, mainly thanks to the lacklustre PC market (Lenovo is an exception here, doing rather well, thank you very much). Imagine you are in their position; suddenly, the biggest software supplier you work with has decided to build hardware — and not just any hardware, but the new premium form factor you were planning to use to relaunch your business. Sure, this might “prime the pump” for Windows 8 tablets from other OEMs (as Ballmer hopes) or it could be like partnering with Nokia on phones — instantly alienating other manufacturers like HTC, Samsung, etc.
  • The Windows RT Surface — hmm. Windows RT on ARM seemed like a great idea when announced last year, but in the subsequent months, Intel has pulled a rabbit out of its hat and got x86 architectures performing almost as well as ARM while not being power hogs. So, you’ll now have the choice of a premium ARM tablet running Windows RT (admittedly with free MS Office) but doing little else that people would recognize as Windows — or an x86 tablet running “proper” Windows 8 with full (or nearly full) backward compatibility for more or less the same price. This is not a difficult choice. Admittedly, given that Microsoft is targeting businesses initially with the x86 tablet, its version will be more expensive, but expect one of the OEMs to have a cost-comparable 10-inch tablet running full Windows 8 at or just after launch.
  • It’s time for Android to step up. Android tablets have represented the only really viable alternative to the iPad to date, and yet most have failed to make a mark with buyers. We’re finally getting some good devices (like the ASUS Transformer and Samsung Galaxy Tab), and the Google Nexus tablet is — allegedly — just around the corner. If manufacturers (and Google, of course) want to stay in competition, they need to up their game and produce more stable, aggressively priced devices that can either undercut the Windows/iOS devices (like the Amazon Fire) or offer something better.
  • Are apps the be all and end all? Much discussion is already centring on whether the Surface tablets will have a sufficiently developed apps marketplace to thrive. Certainly, the iPad has been driven by the legacy success of the iPhone apps marketplace; certain categories of applications, such as games, social media clients, and photo manipulation, figure highly in terms of what people use their tablets for. Given that this is effectively a new platform, the ARM Surface will need apps to survive, but the x86 Surface may be able to flourish (at least initially) without this. Why? Windows 8 (on x86) will be the first OS designed for a tablet with backward compatibility (and no — backward compatibility with a phone doesn’t count); on day one, it will already have access to more apps than all the other platforms (although, admittedly, many of these won’t work well with the Metro UI out of the gate).

Overall, while we’re still awaiting vital details, the Surface announcements do at least show that Microsoft is prepared to make a major strategic shift into hardware to protect its position. I have high hopes for the x86 Surface (and the competing OEM that it might spur), but I see the ARM Surface device as falling between multiple stools — a tiny apps market, not as polished as an iPad, not as cheap as an Android device, and not as practical as its own stablemate.

What Does HDD Manufacturer Consolidation Mean For The Wider Technology Industry?

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As of last week, when Western Digital’s proposed deal to buy Viviti Technology (formerly Hitachi GST) was finalized, the world has just three global suppliers of hard disk drives (HDDs). Western Digital, Seagate, and Toshiba control around 50%, 40%, and 10% of the market, respectively. The history of acquisitions in this space is fascinating, as shown by this diagram (courtesy of a great article on Wikipedia):

Admittedly, some fairly stringent conditions have been imposed by regulators on both Seagate and Western Digital for their latest acquisitions — including running separate operations for a number of years. But a market of up to 700 million HDD units per year (if you extrapolate from iSuppli numbers) is boiling down to just three suppliers. While solid state drives (SSDs) are manufactured by a whole range of firms, these will be too expensive for most applications and will have too low a storage capacity to match hard disks for the next 3 to 4 years.

What does the wider consumer technology industry gain and lose from this accelerated market consolidation?

Glass half-full:

  • Stability. All three firms now have a steady volume business, decent balance sheets, and forecasts of healthy market growth for the next few years.
  • Concentrated evolutionary innovation. The three firms will now provide a top-down focus for research into improving capacities, energy usage, and form factor. While there are some differences in capability — Western Digital has not yet developed hybrid drive technology, for instance — all are focusing on a continued supply of better and better conventional HDDs. This isn’t particularly sexy, but it is at least dependable.
  • Consistency. Fewer manufacturers mean fewer variations in elements like controllers, cache, and software drivers, making the specification and manufacturing process somewhat easier.
  • Better ‘partners.’ One additional benefit deriving from the previous three points is that firms in the position that Western Digital, Seagate, and Toshiba find themselves in often start making more of an effort to be proactive partners with their customers — allowing them to better understand client demands and needs to ensure that their competitors don’t get a foot in the door.

Glass half-empty:

  • Reduced supplier competition. Obviously, all three firms will compete massively for market share, particularly Seagate and Western Digital; Toshiba is so far behind that it doesn’t stand a realistic chance of catching the top two. But where is the plucky little manufacturer targeting industry verticals? Who will force the pricing issue?
  • Global supply chain risks. As we saw with the Thailand floods in October 2011, disruption in a manufacturing supply chain concentrated in one country or region can have a knock-on effect, although arguably it wasn’t as much of a disaster as many predicted — helped by generally lackluster PC and technology sales. Will the supply chain consolidate even further in China and Thailand now that just three firms control the purse strings?
  • Suppliers with more power. Consumer technology manufacturers already have to deal with component-supplying titans like Microsoft, Intel, and Samsung; you can now add Western Digital and Seagate to that list.

Overall, these acquisitions show the natural (if somewhat accelerated) consolidation of a costly manufacturing industry that doesn’t necessarily deliver fantastic margins; those are, hopefully, reserved for the final device manufacturer. For the technology industry, the pluses probably outweigh the minuses; even in the worst-case scenario where competition decreases, SSD manufacturers will keep pushing the envelope and keep the HDD titans on their toes.