Microsoft, Apple and the HP Gambit

The two major initiatives in the consumer market this year have to do with digital media, and they are from Microsoft (Nasdaq: MSFT) and Apple (Nasdaq: AAPL). Microsoft's is the broad Media Center Edition that encompasses the home and provides your music on a variety of products, while Apple's is more targeted at just PCs (both Apple and Windows) and the iPod. The two companies overlap in only one area -- the Windows PC -- and even here they differ in approach. Apple is mostly music (although it just added still images to the iPod) and Microsoft has consistently pushed the envelope with music, pictures and video.

HP (NYSE: HPQ), the other major player involved, is the only company playing with both initiatives. It has the largest sales of Media Center Computers, owning 50 percent of that market, and it is number two with hard drive players, though it got there simply by reselling Apple's iPod.

I know a lot of my peers have been less than overwhelmed by HP's use of the iPod -- given that it is basically an Apple iPod with both HP and Apple logos on it -- but that is short term thinking. Let's take a look at what HP is trying to accomplish and why, if successful, it has the best chance of taking leadership in this emerging segment.

The Apple Advantage

Apple didn't create the hard-drive player segment. It was created a few years back by Creative Labs, which brought to market a rather large (by today's standard) hard-drive player that didn't sell particularly well. In effect it owned 100 percent of the hard-drive player market, but that market was insignificant because the player was too big, too heavy and too expensive (though it really didn't cost any more than a high-end iPod does today).

Apple did two things: it created an incredibly attractive and easy-to-use product that was small enough to carry, and it carried out solid demand-generation marketing.

I am constantly amazed at the number of vendors trying to sell consumer electronics who simply do not understand that competent demand generation is critical if you want to move a lot of product. Apple is the leader not only in the tech industry in this regard: It consistently competes for the leadership position across all industries, and once again last year it was ranked in the top 10 by Ad Week for the iPod campaign. The entire focus of that campaign was on people having fun with the product. What made it particularly powerful was the unique way it portrayed the user of the product.

This has been Apple's historic strength. While the company does build high-quality products that continue to outrank most others according to publications such as Consumer Reports, it is Apple's ability to market these products that has defined its successes -- just as its inability to partner has defined its massive decline in market share on the PC side of the house.

The Microsoft Advantage

Strangely enough, Microsoft's strength is in its ability to partner, and this has never been better on display than in its Media Center launch. I covered that launch at some length in a previous column dealing with the new version of this platform and the 20 or so vendors supporting it.

Microsoft is also very good at broad initiatives like the Media Center. While Apple (and, before Apple, Sony) talked about the PC as a digital hub earlier, Microsoft is the first to actually deliver on the concept. (The other attempts, including Microsoft's own initial one, were more peer to peer.) To make the hub concept work you need more than PCs -- you also need client devices. And to get there on a large scale you need partners, and this is what allowed Microsoft to introducing this market-leading offering.

But just as Microsoft has defining strengths, it has a huge defining weakness: It can't seem to do demand-generation marketing to save its collective, ah, rear end. It just rolled out a $14 million joint marketing campaign with Intel (Nasdaq: INTC) focused on the Media Center PC, redundantly branded Digital Joy. If I were to tell you this campaign poses no threat to Apple in the Ad Week top ten ratings, I'd be making a gross understatement.

I could probably write an entire column just focused on Microsoft's mistakes, from a "high concept" TV commercial that can't seem to get to the point, to the Web site that has load times that make the word "excessive" seem inadequate. It even focuses on the least interesting feature, movies and use spokes characters most of the target audience probably won't identify with. On the positive side it will be a great example for generations to come of what not to do.

My own belief is that much of the pain Microsoft is currently experiencing is tied back to this critical weakness. If it could do a better job of presenting its products in a positive light, it would be more highly valued as a company, its products would be more popular, and the negativity that surrounds the company would be substantially reduced.

Unfortunately, marketing remains Microsoft's critical weakness, just as partnering/licensing is Apple's. If someone could take the strengths of both and combine them, the result would be incredibly powerful.

HP's Gambit

HP knows it can't depend on Microsoft for marketing; this has been particularly clear throughout its relationship with the company. In addition, HP has a number of ex-Apple employees, including its chief strategy and technology officer, so it also is well aware of Apple's weaknesses.

HP, however, looks at this situation as an opportunity; If it can connect Microsoft's capabilities to Apple's, it can cut through the consumer electronics market like a hot knife through butter. To make this happen, it partnered with both, and its top positions in the Media Center and hard drive MP3 player markets are testament to the clear benefits of this approach.

HP has tied the iPod, through a unique to HP Windows-centric iTunes implementation, directly to the Media Center, and it tied its own printer technology into the product with printable skins. While it currently sells only the "traditional" iPod, that model is the one that publications like the Mercury News recommend because it is be the best value and works with the most accessories. HP is even able to emulate the Apple iPod advertisements to push its own product, giving HP better visibility for all of its consumer electronics offerings while slowly transferring the knowledge needed to do this kind of marketing itself.

There certainly are risks. Microsoft or Apple could screw up their sides (and both have done this in the past); someone else could come up with the next killer product (the Gateway media player has great potential); and HP, if it isn't careful, could lose its own brand identity to Apple. But nothing with high potential is without risk.

In short, by partnering with both Microsoft and Apple, HP is able to blend the best of both. It is positioned to do what no other vendor has been able to do: Tie the leading technology platform to the leading marketing capability. If this can be done successfully, HP will be incredibly difficult to match. The reward would seem to significantly exceed the risk.

Just imagine: Microsoft's resources and skills coupled with Apple's design excellence and marketing competence. Who could stop such a company? Who would even want to? And that, my friends is the potential of the HP gambit.