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With Tablet, Microsoft Takes Aim at Hardware Missteps

Microsoft's Executive Officer Steve Ballmer introduces Microsoft's new tablet SURFACE
Joe Klamar | AFP | Getty Images
Microsoft's Executive Officer Steve Ballmer introduces Microsoft's new tablet SURFACE

Around the time the iPad came out more than two years ago, Microsoft executives got an eye-opening jolt about how far Apple would go to gain an edge for its products.

Microsoft learned through industry sources that Apple had bought large quantities of high-quality aluminum from a mine in Australia to create the distinctive cases for the iPad, according to a former Microsoft employee involved in the discussions, who did not wish to be named talking about internal matters.

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.

In the end, the H.P. tablet was thick, the Intel processor it used made the device hot, and the software and screen hardware did not work well together, causing delays whenever a user tried to perform a touch action on its screen. “It would be like driving a car, and the car not turning when you turn the wheel,” the former H.P. executive said.

That kind of problem was unacceptable, especially after Steven P. Jobs, then Apple’s chief executive, unveiled the first iPad, to glowing reviews, just three weeks after the H.P. device was shown.

Microsoft worked with other hardware partners to devise products that would be competitive with the iPad, but it ran into disagreements over designs and prices. “Faith had been lost” at Microsoft in its hardware partners, including by Steven Sinofsky, the powerful president of Microsoft’s Windows division, according to the former Microsoft executive.

H.P. fumed at Microsoft for not doing more to create Windows software that was better suited to touch-screen devices. Executives complained that Windows 7’s keyboard software did not work well, and that on-screen icons were too small for fingers to tap.

Microsoft refused to commit significant resources to help H.P., partly because the company was devoting its energy to Windows 8, a new version of its operating system being tailored for touch-screen devices.

A second former H.P. employee said the company and other computer makers needed more innovation from Microsoft than it was delivering. He said computer makers viewed the licensing fee they paid for Windows as a subsidy for Microsoft’s research and development, an investment that would enable them to have competitive products.

Henry Gomez, a spokesman for H.P., declined to comment.

In April 2010, H.P. made a bold move to gain more control over the software powering its products by paying $1.2 billion to acquire Palm, maker of the WebOS operating system for mobile devices. An important factor in that decision was Microsoft’s repeated delays in releasing a new operating system for smartphones, which paralyzed partners like H.P., according to one of the former H.P. employees.

But poor sales of the WebOS tablet and smartphones doomed the effort. (It did not help that H.P. fired two chief executives during that period for unrelated reasons.) The company has released WebOS as open source software but no longer makes devices based on it. Last year, H.P. briefly contemplated spinning off its PC business before reconsidering the move.

Against this backdrop, Microsoft began to invest more in developing its own tablet hardware, though the company still had not decided whether to sell such a device itself or license it to others by the end of 2010, the former Microsoft executive said.

Some who study the technology industry still believe Microsoft will get out of the business of selling its own tablet computer as soon as it can persuade other hardware companies to build compelling devices of their own. “I think once they jump-start it, they plan to make money the way they always have — from licensing software,” said Michael A. Cusumano, a management professor at M.I.T.

In a nod to Apple’s work with aluminum, Microsoft began to closely study materials that could be used to create a distinctive case for a tablet. Members of the Windows team gravitated toward magnesium, a lightweight metal that felt good to testers when held in their hands, according to the former Microsoft executive.

Last week, Microsoft executives spent a significant portion of their presentation describing the magnesium case of Surface, which they described as strong and scratch-resistant. “The case is one-of-a-kind,” Mr. Sinofsky said, holding the gray device in his hands.

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