How Will Surface Change Microsoft’s Relationship With Windows Hardware Makers?

Read Farhad Manjoo for what Microsoft’s new Surface tablet might mean for the tablet industry.

I’m interested in what it might mean for Microsoft’s relationship with its key partners—the ones who build Windows PCs. After all, for all that Microsoft has become “uncool” and everyone wants to talk about Apple and Google and Facebook, Microsoft still has a very good business. The vast majority of PCs in the world run Windows and Office. Since software can be distributed at zero marginal cost, selling software in bulk to the mass market is incredibly profitable. And precisely because there are so many relatively undifferentiated manufacturers of PCs, commodity PCs are cheap and widely available, creating a huge market for Microsoft software.

Now to compete with the iPad, Microsoft has come out with a piece of Microsoft-built hardware. And it’s also coming out with a new version of Windows that seems optimized for the tablet setting, exactly the corner of the hardware market that it’s entering. If you’re a manufacturer of Windows PCs, how does that make you feel? Not good, right? After all, the way a Windows sale goes now is that the profit is split up between Microsoft (via the OS license) and the manufacturer. Microsoft has the ability to price a Microsoft-made device such that the OS profit is subsidizing a loss on the hardware side and still make an overall profit. That would be catastrophic for non-Microsoft manufacturers, but it also seems like common sense that if Microsoft is going to bother to get into this business, they’d want to price their product aggressively and make it a big success.