The executives were stunned by how deeply Apple was willing to reach into the global supply chain to secure innovative materials for the iPad and, once it did, to corner the market on those supplies. Microsoft’s executives worried that Windows PC makers were not making the same kinds of bets, the former employee said.
The incident was one of many over the last several years that gradually pushed Microsoft to create its own tablet computer, unveiled last week. The move was the most striking evidence yet of the friction between Microsoft and its partners on the hardware side of the PC business. It is the first time in Microsoft’s almost four-decade history that the company will sell its own computer hardware, competing directly with the PC makers that are the biggest customers for the Windows operating system.
For hardware makers, the PC market has long been a struggle because Microsoft and Intel , maker of the microprocessors that power most computers, have long extracted most of the spoils from the industry, leaving slim profits for the companies that make them. Manufacturers pay hefty fees to license Windows from Microsoft, putting pressure on them to make computers as cheaply as possible using commodity parts.
That, in turn, has limited their ability to take the kinds of risks on hardware innovation that have helped define the iPad. Furthermore, with the iPad, Apple has proved that there are significant advantages to designing hardware and software together. When separate companies, each with its own priorities, handle those chores, integrating hardware and software can be more challenging.
“You’ve got this sclerotic partnership structure where the partners don’t have any oxygen to be innovative,” said Lou Mazzucchelli, an entrepreneur in residence for a venture capital fund backed by the state of Rhode Island and a former technology analyst. “I believe Microsoft was painted into a corner. If they’ve didn’t move soon, Apple would have so much of a lead, it would be almost impossible to catch them.”
Steven Guggenheimer, a Microsoft corporate vice president, said in a statement that the company’s hardware partners were not a factor in Microsoft’s decision to create a tablet computer of its own. “Microsoft has tremendous respect for our hardware partners and the innovation they bring to the Windows ecosystem,” Mr. Guggenheimer said. “We are looking forward to the incredible range of new devices they are bringing out for Windows 8.”
One of the best illustrations of how Microsoft came to the decision to create its new tablet, the Surface, is the company’s sometimes rocky relationship with Hewlett-Packard , the world’s biggest maker of PCs. Even before the iPad was announced in early 2010, Microsoft executives understood that computers were on the verge of a transformation, to touch-based controls from keyboards and mice.
A decade earlier, Bill Gates, Microsoft’s chairman, had even introduced a forerunner to the iPad — called the Tablet PC — but the product, manufactured by other hardware companies, was clunky. It was a flop.
In 2007, the iPhone opened the eyes of the technology industry to the possibilities of touch-based mobile devices. Microsoft included some crude touch capabilities in its Windows 7 operating system, released in 2009, though few users had computers that could take advantage of the features.
With rumors swirling about Apple’s pending introduction of the iPad, H.P. and Microsoft scrambled to create a new tablet computer, a prototype of which Steven A. Ballmer, Microsoft’s chief executive, showed during a keynote speech at the Consumer Electronics Show in Las Vegas on Jan. 6, 2010.
When it came to making a finished device though, the H.P. tablet — later named the H.P. Slate 500 — began to change for the worse, according to the former Microsoft executive and a former H.P. executive who worked on the project and requested anonymity in discussing internal matters. While its early visual designs impressed many people within the two companies, the product was “completely ruined” as H.P.’s manufacturing organization began to procure the parts they believed would be sufficient to power the device, the former Microsoft employee said.