Microsoft and Google heart hardware

@CNNMoneyTech July 2, 2012: 6:53 AM ET

SAN FRANCISCO (CNNMoney) -- You know June was a peculiar month in technology when the most talked-about gadgets were designed not by Apple, but by software giants Google and Microsoft.

Microsoft unveiled its Surface tablet on June 18, showing off the first PC of its own creation in the company's three-decade-long history. Its coolest feature: A thin-as-paper case that doubles as a touch-sensitive keyboard.

A week later, Google launched its own tablet, the Nexus 7, as well as the Nexus Q media player. The Nexus 7 tablet may not get many "oohs" or "ahhs," but it comes with almost all of the iPad's high-end features for less than half the cost.

Microsoft (MSFT, Fortune 500) and Google's (GOOG, Fortune 500) newfound love affair with hardware doesn't end there.

At a recent trip to Microsoft Research Laboratory in the company's Redmond, Wash., headquarters, the company showed CNNMoney several whiz-bang, early-concept hardware creations.

Researchers there are working on wild inventions such as a wearable projector that allows you to access your smartphone screen on your hand, a mechanical butterfly that flaps its wings and changes color depending on your mood, and a robot proxy that attends meetings in your place.

Microsoft is also developing its popular Kinect gaming accessory to work with tools beyond just the Xbox.

Google too is developing some very futuristic hardware. The company showed off its cyborg-like Project Glass glasses at its I/O developers conference last week in a stunt straight out of an action movie. Google announced Wednesday that the glasses will be available for testing next year, and they will likely go on sale in 2014.

The search giant has also famously developed an autonomous car, building add-ons for a Toyota (TM) Prius that allow it to drive itself. But not all of Google's hardware is so far-off in the future: Google also continues to design Nexus-branded smartphones as well as Chromebook laptops, and it recently completed its acquisition of Motorola Mobility.

Software is still clearly the bread and butter of both Microsoft and Google. Windows and Office are by far Microsoft's biggest profit generators, and search represents more than 95% of Google's sales. So why this obsession with hardware?

Well, there is that rag-tag Cupertino, Calif., based company you might have heard of. Apple (AAPL, Fortune 500) has built itself into the most successful technology company in the world by designing gorgeous hardware and integrating it flawlessly with its own software.

Microsoft and Google have historically preferred the "open" model: building software and licensing it to hardware makers. It has worked very well for both, as Windows runs more than 90% of PCs and Android runs more than half of all smartphones.

But open has its drawbacks. Hardware makers' margins are notoriously razor-thin, so innovative design sometimes takes a back seat to functionality. Hiccups when integrating the software aren't unusual either.

Microsoft CEO Steve Ballmer hinted at the company's Apple envy during the Surface announcement: "We believe that any intersection between human and machine can be made better when all aspects, hardware and software, are working together," he said.

But for all their success in computers and phones, neither Microsoft nor Google have made the kind of dent that Apple has in tablets. The iPad has begun to eat away at PC sales and Google's tablet market share is waning.

Without a big, splashy tablet to offer their customers, it's unlikely that trend would change dramatically. Microsoft and Google clearly figured it was time to follow Apple's lead and do the work themselves.

"Apple's success in building its own fully integrated hardware and software systems and devices has not escaped Microsoft or Google's notice," said Laura DiDio, principal for ITIC. "Yes, it's a big gamble, but the bigger risk for both companies would be not to take the gamble."

It's a model that Microsoft and Google appear to be sticking with for the long term. Both companies are investing heavily for the future. Whether its wearable displays, driverless cars or robots, Microsoft and Google are taking advantage of their vast resources and deep pockets (Microsoft has $58 billion in cash, and Google has $48 billion) to get out in front of the next big trends.

Of course, it's not like either of them can outspend Apple though. The maker of iEverything has $110 billion in cash.

It's also doubtful that either Microsoft or Google will journey too far from their software roots or even their open business model. But by increasing their focus on hardware, they can work more closely with their partners, pointing them in directions they may not have been able to conceive.

"Microsoft and Google are going to stick to their tried and true business models in the long run," said Al Hilwa, analyst at IDC. "However, they have decided to work harder on software integration with hardware makers, and they will engage in stimulating the device market with showcase offerings."

That means Nexus for Google and Surface for Microsoft are -- pardon the pun -- just scratching the surface of what each company will be doing with hardware in the future. To top of page

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