Microsoft Tries to Fix the PC Industry

Microsoft unveiled its Windows-powered tablet computer in a renewed attempt to take on Apple's iPad. Photograph by Jonathan Alcorn/Bloomberg

Don’t like the slow pace of your suppliers or business partners? Innovate for them—so you’re not dependent on their lame efforts.

That’s the new growth strategy at Microsoft.

This week the software giant announced it was getting into the hardware business with a new tablet computer to compete with the iPad: the Microsoft Surface.

While some view this as a risky move into an unfamiliar market, it’s clear that Microsoft’s real motivation is to fix the sleepy PC industry, which it depends on to sell its software.

More than 60 percent of Microsoft’s revenue comes from its Windows and Office software—sold primarily via new PCs. But the big PC makers—Hewlett-Packard, Lenovo, Dell, and Toshiba—have essentially failed at developing cool new devices, as Apple has gained a greater and greater share of the market.

So instead of sitting on the sidelines nervously watching its revenue stream evaporate, Microsoft decided to take matters into its own hands. The new Microsoft Surface is full of bells and whistles—all the innovative features the PC companies should be offering on their tablets.

Microsoft added fuel to the fire with a big, public press conference on Monday, a full four months before the first unit will be ready, in an apparent attempt to prod PC makers to get in the game and copy some of these ideas themselves.

Upstream innovation is not a new idea, but it is a growing trend. The Google Chrome browser was launched in 2008 because Microsoft’s archaic Internet Explorer was slowing down Google’s online ad revenue. Chrome now has a 32 percent market share, and it forced Microsoft and others to upgrade their own browsers.

Netflix went upstream with its innovation, entering the content creation business this year to supplement the limited content available to it from Hollywood studios. Netflix invested in the production of five different TV series, including the successful Lillyhammer series.

Nontech players are also getting into the game. Safeway supermarkets have been losing ground to natural/organic competitors such as Whole Foods and have not been getting sufficient offerings from such traditional suppliers as Kraft, Nestlé, and Unilever. To combat this trend, Safeway developed its own healthy food product lines—O Organics and the newer Open Nature. The O Organics line, which has been around a few years, generates about $500 million in revenue and is also sold by Safeway to other, noncompeting grocery chains.

In the past, companies and entire industries have been held hostage to the capabilities of slow or myopic business partners. The lesson from Microsoft and others is to stop sitting on the sidelines and go out there and innovate for them.

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