Why big tech companies keep pouring money into hardware when Apple still dominates
Sundar Pichai, senior vice president of Android, Chrome and Apps at Google Inc., gestures as he speaks during the company's Android One smartphone launch event in New Delhi, India, on Monday, Sept. 15, 2014.
Kuni Takahashi | Bloomberg | Getty Images
The holiday shopping season is right around the corner, and all the biggest tech companies are coming for your wallet.
In the past two months, Google has revealed new Pixel phones, Microsoft has launched Surface tablets and laptops, Facebook has introduced a new smart display called Portal along with Oculus VR headsets and Amazon has rolled out a bunch of gadgets that work with its voice assistant, Alexa.
These are the dominant players in software and web services and they're trying to play in the hardware world, where Apple owns the consumer's wallet. Google's Pixel devices, for example, have less than 1% of the global market share, according to IDC.
While Google and Microsoft have to deal with scores of partners to make hardware that runs their operating systems, Apple controls both the hardware and software and can dictate the entire user experience. It's the foundation of Apple's $266 billion in annual revenue.
Still, there are strategic reasons for big software companies to launch their own hardware, even if they aren't throwing off billions in profit like Apple.
"As software, these companies have staked out strong reputations to deliver equally strong experiences," said Ramon Llamas, research director at IDC. "Coupling them with their own branded hardware makes for a total experience exactly how the vendor has envisioned, and within each category, there is a significant number of loyalists.
Here's why the world's most valuable software companies want to sell you hardware.
Pixel 4 renders published by iGeeksBlog.
iGeeksBlog
Google earns nearly all of its revenue from online advertising, so why did it launch new Chromebook laptops and Pixel phones this week, especially when giants like Samsung and Lenovo already use its Android and Chromebook software?
Google wants users to be able to pick up a variety of different gadgets to access services like search or Gmail, whether on a Chromebook, a phone, a voice assistant in your earbuds or in a smart speaker in your home.
It's a concept Google calls "ambient computing." As Carolina Milanesi of Creative Strategies wrote this week, "The devices are not the final product; the technology in them is."
Google's head of hardware, Rick Osterloh, described it this way: "Our vision for ambient computing is to create a single, consistent experience at home, at work or on the go, whenever you need it."
One way that Pixel phones can help achieve Google's aims is by offering a niche product that gives access to unvarnished Google software. Partners like Samsung often add their own spin to Android to differentiate themselves, like Samsung's Bixby voice assistant. That can get in the way of what Google's trying to do with ambient computing.
"In the process of being a software provider, and search engine, Google has earned the loyalty of millions of people, who just want to have that Google experience, taking out that bloatware that all these other vendors add," Llamas said.
Surface Laptop 3
Todd Haselton | CNBC
Microsoft
Microsoft sells a lot of Surface computers: $5.7 billion worth in the year ending in June, according to a company filing.
That's at least one good reason why Microsoft released laptops and tablets, including the Surface Pro X, the Surface Laptop 3 and smart earbuds. As former Microsoft CEO Steve Ballmer said earlier this month, "there's plenty of profit in hardware."
But Surface is responsible for just under 5% of Microsoft's total revenue — it makes more revenue from LinkedIn and cloud services, and it's best known for its Windows and Office software.
The world's biggest computer manufacturers also buy Windows software to power their laptops and tablets, which sell in much greater numbers than Microsoft's first-party hardware. Microsoft's Surface makes up less than 5% of the tablet business worldwide, according to IDC.
One reason why Microsoft invests in its Surface lineup is that it gives its partners a glimpse of where Microsoft wants to take Windows in the future. It's a lot easier to introduce complicated new features and new designs when one company controls both its hardware and software.
"With every massive shift in tech, or when that change starts to the happen, the form factor changes too, and that's what we are starting to see here," Panos Panay, Microsoft's chief product officer said earlier this week.
Two hardware items announced last month underscore this point: Surface Duo and Surface Neo.
Surface Neo is supposed to go on sale by the end of 2020, and it's a double-screen folding laptop. The idea is that it can be a powerful computer you use while you walk around thanks to a totally new design.
Surface Duo is a folding phone running Google's Android, also expected to go on sale over a year in the future. It's the latest signal that Microsoft wants to closely integrate its Windows desktop system to play well with Android smartphones.
The Amazon Echo Loop is an experimental product that will let you talk to Alexa from a ring on your finger. Amazon unveiled it at an event in Seattle on Sept. 25, 2019.
CNBC | Todd Haselton
Amazon
Amazon's hardware strategy is to throw stuff into the market and see what sticks.
The company also hopes that it can get users hooked on its voice assistant. At a launch event in September, it released a lot of new products, including headphones, speakers, wearables and even a pair of computer glasses. The one commonality among the products? They all can summon Alexa.
That's led Amazon to have a dominant 75% market share in smart speakers around the world. If voice interfaces continue to grow, Amazon has the advantage.
"The hardware is the starting point, but Alexa is the thing that keeps you coming back," Llamas said. "It's not so much they're trying to make money off of that hardware, if they are making some it's probably not much. Instead, you're going to be reaching for Alexa or Amazon to make that next purchase."
If an individual product doesn't resonate with consumers, Amazon quietly ends the product line. But if it takes off, that helps Amazon's goal of getting Alexa everywhere.
"Not all companies have that luxury," Llamas said. "It helps to be Amazon with billions, so if a product fails, the lights will still be on tomorrow."
Amazon's hardware strategy is somewhat different from Microsoft and Google, both of which own massive computing platforms. While Amazon has released Fire tablets running on a custom version of Android, it's never owned a gateway platform like the other tech giants.
The Facebook Portal has a web browser.
Todd Haselton | CNBC
Facebook once wanted to make a phone.
That project failed, leaving the company without control of the hardware and vulnerable to changes from companies like Google and Apple.
So Facebook is looking for the next big platform. It's investing in smart displays, like Facebook Portal and virtual and augmented reality.
And it's telling the world about its plans.
"I've been saying for a while that augmented and virtual reality is going to be the next major computing platform," CEO Mark Zuckerberg said on stage at the Oculus Connect 6 conference last month. "You know, there's only so much you can do with apps without also shaping and improving the underlying platform."
Facebook is spending real money on this project — it bought Oculus for $2 billion and it paid between $500 million and $1 billion for CTRL Labs, an early-stage company that could be the technical basis for a way to control computer glasses without a keyboard or mouse.
It's early for Facebook. Portal only has 1% of the smart display market. And while Oculus is one of the leaders in the VR market, with 27% market share according to IDC, it's still a very small business.
WATCH: Facebook adds workplace support to Portal devices
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