Hardware/Software Integration: Is It The Engineering Or The Business Model?

The Microsoft Surface and just-announced Nexus 7 tablet from Google indicate that we’re clearly seeing a trend toward more Apple-style integration of hardware and software design. The virtue of this is that it lets you do things like build better trackpads on your laptops or, in my experience, make more responsive touchscreens. That still leaves open the question of what, exactly, about the integrated engineering model makes this possible

A hypothesis I would toss out there is “nothing”—the difference is actually all in the business model.

One way to look at it is that on the traditional Windows licensing model, every computer sold needs two different profit margins. The hardware has to cost less to make than HP or Dell or whomever spent building it, and Microsoft also needs to make a profit. Since the marginal cost of distributing a new instance of Windows is basically $0 this is all good for Microsoft. But Apple gets to basically be Dell and Microsoft simultaneously, meaning they can sell the hardware at cost and then make a profit selling the OS. Apple doesn’t formally account for sales this way, but certainly you can think of it that way—hardware is by definition being sold at cost and then giant profits are accruing to the operating system. The no-profit hardware exists to incentivize purchase of the high margin OS. That means that at any given price point, Apple can afford to make a better piece of hardware than can a Windows competitor.

Another issue is reputation. One important reason to make a high-quality product is to spread the word that your products are great. This is difficult to do if consumers are confused about who makes the product or what’s great about it. If people love the Samsung Galaxy S III then some of the positive reputation ends up “leaking” to other Android phones. Conversely, if people hate a given Android phone (as I hated my Motorola Atrix) then some of the negative reputation hurts the entire sector. Apple is much better situated to internalize the reputational effects of Apple products, so at the margin it makes more sense for Apple to invest in high quality.