[I]f you contract with other people to build equipment, they may be unwilling to invest in quality in the belief that you will use your sole-buyer status to extract the benefits.I agree with Krugman and his reference to Hart, but from my experiences in the hardware market I think Microsoft's primary difficulty emerges from the commoditization of personal computers, both desktop and notebook, and the reluctance of third party manufacturers to take a long-term, quality driven perspective through which they can profit from selling premium products.
And that, apparently, is exactly what has been going on with Microsoft; its reliance on other people to build computers using its software worked very well for a long time, but lately Apple’s control-freak approach has been winning out.
I bumped into a friend recently and noted that he was using a MacBook Pro. I commented that he had traditionally used PC's. He responded that he is OS agnostic, and suggested that his principal motivation for switching was quality. I started to comment about the decline in the quality of the Dell notebooks I've owned and he cut me off, "Dell computers are crap!" So there he was, a guy with enough money to buy a premium computer of any brand, as long as it worked, and he was turning to Apple because, all else being roughly equal, its products are reliable.
The difficulty for Microsoft is that if it builds high-end products, sold alongside third party Windows tablets built to be sold as commodities, even if quality is accepted as a matter of faith it may have difficulty maintaining a premium price point. But perhaps Microsoft accepts that its move may alienate third party manufacturers, and that those third parties will compete more directly with Amazon and... it would appear Google as well, for the lower-end tablet market, while it focuses on a premium product that can compete with the iPad, or at least give Microsoft an opportunity to establish itself as a tablet manufacturer for enterprise customers while it fashions additional products that may have greater appeal to consumers.
Quality? If it wants to offer tablets that can truly be classified as premium, I don't think Microsoft has much choice but to make its own hardware. For any other company, such an approach would involve a significant risk with much of any eventual benefit flowing to Microsoft.