HW vs. SW: Do you have to choose ?

Yesterday’s decision by HP to sell of its PC business prompted me to consider this question of HW vs. SW. I believe the decision by HP to sell of its PC business is the right one (IBM made the same decision in 2005 and was able to transform the company into a highly profitable services and sw giant). Though HP was much more successful in consumer HW than IBM and so watching this transition is going to be interesting to see if they can pull it off.  HP CEO Leo Apotheker’s perspective on the future of HP is clear and he is making the bold moves to execute against it – as usual company culture will be the biggest hurdle (disclosure Leo was my direct boss for 4 years before I left SAP).

But I digress – the conventional wisdom seems to have become HW = Bad, low margin, low growth business & SW = Good,  high margin, high growth and what smart companies should focus on.  This seems also be true in the venture capital community – start up’s that have a HW component to their business are encouraged to ditch the HW piece and focus only on the high margin SW aspects.

You could view the decision by IBM and now HP to ditch their “low margin HW PC business” in favor of higher margin SW and services as a good example of that.  After all HP with $120 bn + in revenue has a market cap of $49 bn and SAP that is a pure play enterprise SW company has revenue’s of $20 bn and a market cap of $58 bn – this must be because of the HW margin drag that HP has to carry.  This is partly due to the margin differential – but does not explain the real issue.

Newsflash for my no-HW friends – our current poster child for technology and innovation Apple has at the core of its success both a HW and a SW business and is now the company with the largest market cap in the world.

Another newsflash – SW needs to run on HW to make it work.

It is absolutely correct that over time HW becomes commoditized and will have a lower margin than SW – this is a no brainer analysis. If you are in the commodity HW business and are simply selling dumb pieces of HW that becomes valuable with SW from other companies then yes you are much better off having our friends in China build this piece of the stack as they can do it much cheaper and better.

But this conventional analysis misses a much more subtle  and critical point – an integrated HW and SW product that is compelling, easy to use, that leverages the strengths of this combination in unique ways and understands the value that each brings to the end user experience is unbeatable.

Could iTunes have been successful without the iPod or in reverse could the iPad have been successful without the apps in the AppStore. Gaming consoles have a combination of both HW and SW packaged in a way that creates a compelling experience.  Even the printer division that HP is keeping is a compelling product because the combination of the HW and SW for that product providers the consumers with a winning package.

To make this point even more powerfully – I think the distinction between HW and SW is becoming less and less relevant.  The only way to make an object “smart” is by adding SW to it.  The number of devices in our lives that have embedded SW is growing dramatically (yes this is partly the “Internet of Things” point).  Your local BMW is basically a SW platform now with a car attached to it.

So yes I acknowledge that a HW business that is only  a box (to put it simply) has little value and must be produced by the company that can do it for as low a cost as possible – but the real magic is in combination of elegant HW and compelling SW.

So the Right Question in this case is “How can you build a compelling product that combines the best of HW with the best of SW in an experience that is magical” not the simple wisdom of HW is bad lets only focus on SW.

As always, thoughts and comments are welcome.

Zia.

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5 Responses

  1. Zia – I have been harping along the same note for a few years now. As a predominantly Hardware professional it’s perplexing how Tech/Silicon Valley has seemingly shifted focus from HW to SW, thus putting the cart before the horse.

    • AR – thanks for your comments. I do think that SW has much better economics and in a world where we have cloud based services etc. SW becomes the key driver of success. However, as i point out, if you can figure out an integrated device approach that could help you build even greater value – but not easy to do.

      Zia.

  2. Fully agree with the integrated solutions tone of your article. To the degree software innovates new functionality and the hardware changes as needed to empower and/exploit that capability, that is a valuable and differentiated offering.

    Apple is an excellent and exceptional example of this. I think exceptional is the right word by Apple has optimized for product excellence by (I am told) not giving Divisional VPs a P&L. From what I’ve heard from Apple employees, Steve’s message is (paraphrase) “build an excellent product and others will worry about the cost.” Sounds like people get to dream and make it a reality. It’s paying off.

    Apple is to be respected for their continued macro-innovation of new platforms (iPod, iPhone, iPad) as well as their micro-innovations, such as Lion OS, which has simply blown past Windows on all key fronts of function, speed, comfort, integration, intuitiveness, and more.

    Time to market continues to be an important factor. Now that Apple is “getting their first” (beating MSFT and Google to the best phone, pad etc.), Apple’s growth is more explosive and with a more mainstream consumer audience, where user experience and ease of use matter.

    So the right question might be will Boards, CEOs, and executive teams in corporate America have the vision, trust, and guts to embark in the creation of a similar corporate culture for their company?

    • Kurt – thanks for the comments. Your are quite right , more than anything else for Apple it is an unwavering desire to build great products. However, replicating any culture is very difficult to do – it starts with hiring and firing and everything in between.

      Zia.

  3. I’d like to start my comment by referring to Wikipedia’s definition of commodity: “A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market” So, by this definition commoditization will happen to any product, SW or HW as long as that product doesn’t differentiate itself. In the case of the tech industry, differentiation comes through innovation and companies that don’t innovate get commoditized.

    A famous quote by Paul Graham that I think illustrates this perfectly says: “Consulting is where product companies go to die. IBM is the most famous example. So starting as a consulting company is like starting out in the grave and trying to work your way up into the world of the living.” Consulting companies bread-and-butter is SW services and IT services so commodization will happen to anyone that does not differentiate.

    I think a mistake a lot of people make is thinking that HW and SW are two different entities that can be easily separated while keeping innovation and quality the same.

    Finally, there are also examples of companies going the other way around as it is now the case with Microsoft teaming up with Nokia, Google purchasing Motorola Mobility and RIM being in no-man’s land. They can’t compete with Apple’s quality because they don’t control the Hardware platforms.

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