Nothing Will Be Just Hardware Any More

Reports that Apple (AAPL) is finally building a TVand Microsoft (MSFT) is integrating its Kinect system into TV commands imply something very important investors need to understand.

Nothing is going to be “just hardware” any more. It's all going to be part-software. That software is going to be complex, it needs to be integrated, and it will give people new ways to control the things in their lives.

Both Microsoft and Apple have been working along these lines for over a decade. Home automation combines intelligence within devices with an operating system and a user interface so you treat it all as a whole rather than a collection of parts.

Whose operating system? Obviously Apple wants you to get all new stuff running something like its iOS. Microsoft wants Windows to be the operating system, at least in the background. Google (GOOG) sees Android and its Internet services as the connection.

But this leaves out a whole lot of companies, brand names we have become accustomed to. The brand names on our TV, obviously, but also our other home electronics. The brand names on our appliances, and on the other stuff in our home, become secondary to the question of whether they work with our other stuff. An operating system or method becomes an “ingredient brand” that consumers will use to take a first cut on what's available to them in the market place.

We're seeing the impact of this first in the PC space, where Hewlett-Packard (HPQ), Dell (DELL) and other hardware OEMs are finding their interests subsidiary to those of software vendors, and their wares reduced to low-value commodities. HP's failed webOS was an attempt to fight this trend.

But now we're going to start seeing the same thing happen in other markets, like TVs, as software makers build in ways to control all devices from something like iOS, Android or Windows.

These are early days for the transformation. We don't know who is going to win. We don't know, exactly, how consumers will react to having everything they buy integrated, under something like an operating system.

We just know it's coming. And we have a much better idea of who the contenders are in this new market. Apple, Microsoft and Google.

Disclosure: I am long GOOG.