Why big tech keeps trying its hand at hardware

Google, Amazon and Microsoft are making new devices, but they’re really selling touchpoints

The world’s largest technology companies are selling more devices than ever, but only Apple makes much money doing it.

That harsh reality is unlikely to change any time soon, despite a raft of new gadgets coming this fall from Google, Amazon.com and Microsoft. They include smartphones, smart speakers, tablets, laptops, headphones and even a voice-activated microwave oven. Facebook is getting into the game too with the Portal, a video-chat device that assumes there are still some people out there willing to trust the company enough to put one of its cameras in their home.

The success of all these new devices will vary widely depending on their segment. Amazon and Google currently lead the smart-speaker market while Microsoft has carved out a respectable niche in tablets. Meanwhile, despite owning the leading mobile operating sys- tem, Google has barely made a dent in smartphones. But for all these companies not named Apple, hardware remains a sideshow to much larger and much-more-profitable core businesses. Even unexpected success with their latest offerings won’t change that.

Consider that if Google were to sell 14 million units of its newest Pixel 3 smartphone over the next year—more than double what IDC estimates the company has sold over the previous two—that still would amount to less than 10% of parent company Alphabet Inc.’s projected advertising revenue over that time. Microsoft’s Surface revenue over the fiscal year ended June amounted to just 4% of the company’s total. And, while details are scant for Amazon’s hardware sales, it would take a whopping 100 million units of its $99 flagship Echo smart speaker to comprise 4% of the e-commerce giant’s projected revenue this year.

So why bother? The motiva- tions vary slightly from company to company and likely include a bit of pride and fear of missing out. One thing the world’s largest tech companies have in common, though, is that all got where they are by developing services that have made deep inroads into users’ lives. Their continued growth depends on expanding that engagement, and selling devices has proven a good way to do that. Brent Thill of Jefferies calls devices from Amazon, Google and Microsoft “onramps to subscriptions.”

Take smart speakers—a market segment Amazon essentially created with the launch of its first Echo four years ago. Many of the devices Amazon and now Google sell into this segment cost as little as $50 and occasionally even less. They drive usage of the companies’ core services. A recent survey by Kantar Worldpanel’s ComTech service found that 56% of Amazon Echo owners subscribe to the company’s streaming music service. This segment is growing quickly. Market research firm Canalys expects the global market for smart speakers to more than double to100 million devices in 2018.

Other device markets are much tougher for even huge companies to crack. Microsoft’s Surface devices effectively developed a lucrative niche for business-focused tablets. The recently unveiled Surface Pro 6 tablet and Surface laptop 2 seem likely to build on that niche. But the premium-design segment of tablets and laptops is also right in Apple’s wheelhouse, making that a much tougher market. While Surface revenue rose a respectable 16% to $4.7 billion in the fiscal year ended June, that is just 10% of what Apple generated through the sale of iPads and Mac computers during the same period.

Microsoft’s surprise offering this year was a $350 pair of wireless headphones which will also have to compete with Apple’s Beats brand that is cur- rently the top-selling brand of wireless headphones in the U.S., according to NPD.

No market has proven tougher for an outsider to crack than smartphones. Amazon and Microsoft have effectively given up on the space. Meanwhile, Google’s Pixel phones, considered by some to be the best Android phones on the market, have garnered barely one-tenth of1% of the global smartphone market since their first launch in late 2016, according to IDC.

Investors might wonder if that is even worth the effort. Device market share isn’t the true point of the exercise, though. These technology behemoths need as many touchpoints as they can get to drive user engagement. Google and Amazon in particular are racing to build the voice-controlled platforms of the future, which means both need to seed the market with all the microphone-bearing devices they can. In that light, even a few million phones help more than they hurt.