How Google, Apple and Microsoft software is smashing Asian hardware makers

Believe it or not, we’re in the midst of another massive paradigm shift in technology – and once again, it’s because of Apple.

Peter Nowak 0

Google Nexus 7 (Paul Sakuma/AP)

Believe it or not, we’re in the midst of another massive paradigm shift in technology—and once again, it’s because of Apple.

Relax haters, this isn’t some fanboy rant about the latest cool features that Apple is adding to its devices which competitors have already had for years. This has more to do with the change in business models that the iPhone maker is ushering in.

Historically, technology has gone through rotating periods of proprietary-ness versus openness. What has usually happened is that one company has come to dominate a particular field with its products, then had its monopoly smashed either by authorities or by co-operating competitors that stressed openness and interoperable standards. It happened with IBM and computers and with Microsoft and software.

With the ascension of Apple, the king of proprietary-ness, into the world’s biggest and most influential technology operation, other companies are now starting to emulate how it does things, especially in the realm of vertical integration.

In the space of a week, both of Apple’s biggest competitors—Microsoft and Google—announced their own custom-built branded tablets. Microsoft last week unveiled the Surface while Google on Wednesday announced the Nexus 7, a seven-inch tablet that is manufactured by Taiwan’s Asus but which is otherwise a Google device through and through.

In both cases, there is a touch of desperation. Apple continues to dominate tablets with more than 65% of the market, with only Amazon’s Kindle Fire managing to breach double digits. It’s no coincidence that Amazon is an American company—but more on that in a second.

Both Microsoft and Google have traditionally been “partner” companies, meaning they simply license their software to hardware makers to do with as they please. Both of the tablet announcements, plus Google’s efforts with its “Nexus” branded smartphones—not to mention the possibility that Microsoft could make its own branded phone (a rumour the company has denied, but which shouldn’t be discounted)—are sharp shifts towards Apple’s way of doing things.

While hardware partners are free to continue making their own Android and Windows devices, Microsoft and Google are increasingly telling them, “Hey, you don’t know what you’re doing, so we’re going to do it ourselves.” Put another way, none of those hardware partners have managed to achieve Apple’s levels of success in phones or tablets. Sure, Android has a much bigger share of the overall smartphone market, but no single model comes close to matching the iPhone.

What the hardware partners have succeeded in is establishing a race to the bottom. Windows PCs and many Android phones are seen as—and priced as – entry-level devices. That might be fine for Google, which wants its devices in the hands of as many people as possible so that it can pump ads to them, but it certainly isn’t a desirable position for Microsoft. While Apple has become the most profitable and valuable tech company around by charging people premium prices for phones and computers, consumers are scoffing at paying $500 for an Acer or Toshiba laptop running Windows. Microsoft only makes money from its Windows license, but with a higher price tag on the overall computer, it could easily charge hardware makers more. The same goes for phones and tablets.

Not being able to crack Apple’s market share or its profitability is why traditional hardware partners—almost all of whom are based in Asia—are being shunted to the side, and why the major tech players are shifting toward vertically integrated models.

In many ways, it’s the hardware makers’ own fault. For decades, they’ve pumped out annual iterations of new televisions, DVD players, phones and whatnot that have had some minor improvements, and they did well on that. But as everything becomes more internet-dependent and the hardware becomes less relevant, the software in the devices is what matters. And it’s no exaggeration to say that the non-Android or Microsoft software powering devices from the likes of Sony, LG and Panasonic is generally craptastic.

Hardware is thus quickly becoming commoditized. As one analyst recently told me, many consumer electronics will soon be coming out of cereal boxes, which explains the “bloodbath” currently happening among Japanese companies, where big losses and merger talk is all the rage. Software, and more specifically its integration with hardware, is where it’s at.

The next area where this trend will be felt is in the bread and butter of the Asian companies: televisions. Microsoft, Google and Apple all have their eyes on this prize. At E3 earlier this month, Microsoft announced the Smartglass app that will effectively turn TVs connected to its Xbox 360 into giant tablets, while Apple CEO Tim Cook recently said that television is an area of “intense focus” for the company. Both will inevitably pull viewers further away from the actual TV manufacturers and closer to the American companies. In Apple’s case, that might happen entirely.

On Wednesday, Google showed off its effort, Google TV, at a press event in Toronto. The set-top box, which is finally launching in Canada in August as the Sony Internet Player, brings Android apps and web browsing to the TV. The device is built by Sony, which itself is a sort of admission by the company that it indeed doesn’t do software very well.

Nevertheless, Google TV hasn’t done very well in the United States, where it has been available since 2010, largely because of clunky implementations by partner companies. Sony’s new device may not fare any better: in the demo I attended, the touch pad on the handheld controller didn’t exude the same sort of smoothness you get from a smartphone or tablet. Anything less than perfect control could be a deal breaker.

Lo and behold, on the same day as its Canadian event, Google announced the Nexus Q, its own set-top box that starts selling in July. Its partners’ devices haven’t even launched and Google is already saying it knows better.

Buckle up: for the next few years at least, we’re in for one hell of a vertically integrated ride—and it’s one that spells nothing but more trouble for Asian technology companies.

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