Apple has proven that vertical integration works better

“When Microsoft launches its Zune to compete with Apple’s iPod, it won’t just be reversing its own strategies but going against two decades of received wisdom. This could indicate a sea-change that will help more people get what they want. But it could also lead to users being increasingly locked into whichever systems they happen to buy – and ultimately paying higher prices,” Jack Schofield reports for The Sydney Morning Herald.

“The idea’s poster boy is Apple’s iPod system, which includes the online iTunes Music Store and iTunes software on personal computers. Analysts believe that this vertical integration of online store, PC and portable player enabled Apple to deliver the ease of use that helped it overwhelm the businesses that pioneered the digital music business, such as Elger Labs, Creative Labs and OD2 (On Demand Distribution), the online music service launched by musician Peter Gabriel,” Schofield reports.

Schofield reports, “Apple’s vertical approach to the music market matches its vertical approach to personal computers, where it maintains control of both hardware and software, its own online service and even its own shops. Microsoft’s horizontal approach matches the one it took with its DOS and Windows operating systems: it licensed them as widely as possible. For Microsoft to try the vertical approach is out of character, and means it will be competing against itself and its own partners in Play For Sure.”

“The trend towards vertical integration is also visible in the printing and digital photography markets, where companies are linking personal computers, printers, printer cartridges, photo paper and online services,” Schofield reports. “Is it worth trading some choice for simplicity and a better end-to-end experience? The problem is that vertical integration can give suppliers so much control that they can manipulate prices.”

Schofield reports, “Vertical integration may now be making a comeback because consumers are facing the problems businesses faced before: integrating a wide array of products that they barely understand. These include PCs, printers and webcams, smartphones, portable media players, digital cameras, set-top boxes and digital video recorders, games consoles, internet phones and home networking.”

“But I also suspect that as these markets grow and mature, they will tend to tip over into horizontal ones. If we’re going have 10,000 manufacturers, we can’t have 10,000 different processors or operating systems, and we don’t want 10,000 different DRMs. Common standards have to emerge,” Schofield writes.

Full article here.
We wouldn’t trade our Macs and Apple’s vertical integration for a Dell or any other Windows PC even if our Macs weren’t less expensive than comparable PC boxes. Ditto for iPod+iTunes. We want and need our tech to work well.

Related articles:
Microsoft tries to match Apple’s vertical approach – October 11, 2006
Apple was right all along: vertical market quality trumps horizontal market woes – April 30, 2006

16 Comments

  1. Where did he come up with that 10,000 number? So far I see three real PC operating systems (OSX, Windows, Linux) out there. A handful of printer, camera, scanner, cell phone manufacturers. 10,000 different?!? I don’t see it. It’s just FUD.

  2. Their own online service? I’m sure he is referring to .mac, but any average PC user will read that and think that Apple is an ISP. Thus, perpetuating the myth that when you buy a Mac you need to buy everything from them. There are so many myths out there about the Macintosh platform that need to be squashed.

  3. Let’s assume Apple actually grabbed 80% market share at some distant point in the future. The government would have no choice – and rightly so – to force Apple to open it’s OS to other hardware manufacturers. OS semantics asides, they would face some the same issues Microsoft now does.
    Products, no matter what kind they are, must survive in the wild and the companies that have succeeded in the long run have learned to live with unexpected changes in the business environment and challenges of managing in a world of conflicting rules and desires. Just as in nature, closed eco-systems like Apple, tend to remain niche occupying a small piece of the landscape because they have found protected environment within which they can survive.
    Ultimately Apple has to move out into the wild and I suspect Steve Jobs probably understands that but knows he can run things as they are now until the Mac reaches some tipping point. Competing in the wild and allowing other manufactures to build boxes for OS X, is only way Apple will ever overcome Microsoft. It’s just a matter of when.
    If Apple doesn’t make that move, then their current success will stall at some point for some as yet unseen reason or set of circumstances just as it did in the 90s. Something will come out of the “wild” and spoil their plans forcing it to remain in their protected, niche environment.

  4. Riiight. We all know that generalizing is always bad, because some anonymous hater on MDN says so. Poor logic in the article does not excuse your own poor logic (which consists of generalizing about something you know nothing about).

    Uhm, any company can manipulate prices. In fact, they do so every time they sell something. If you mean “charge a premium that everyone has no choice to pay” a la monopoly tactics, that’s quite imaginary. If you want to buy Apple, then you pay the price they set. But you don’t have to buy Apple. That’s the thing — the vertical markets we see here are nothing like the vertical markets created by Standard Oil or AT&T, for instance. I don’t recall people being able to buy second-hand oil in bulk, or reused phone service. And a computer is much less important to your physical survival than communication or heating oil, for instance. It’s pretty small potatoes, these “vertical markets”.

  5. In the tech industry if there ARE 10,000 companies involved (e.g. email servers, USB devices), then usually there are STANDARDS that all manufacturers abide with.

    This is why I like the fact that Macs are based upon Unix – it means that it can access open standards or put their software into the open community (Darwin, Bonjour) or licensed community (iPod connector, QuickTime, FireWire).

  6. Hmmmm, another clueless writer looking for something to say that sounds good.

    Suddenly vertical is good, just because Apple is vertical.!!! Clueless. Apple makes things that — wait for it — JUST WORK!!! Yes, they had to go vertical because they were not super big. But as long as your suppliers support your standards things work good.

    The trouble is greed. Everyone wants ALL the cookies (money) and rather than working together, they stomp on each other — every chance they get. Result. Crappy product, does not work together. Just junk.

    PS. Be an mp3 player. You can run off iTunes just fine and if sell it cheap, you can be the biggest player in that market. ” width=”19″ height=”19″ alt=”grin” style=”border:0;” />

    But everyone wants to be Apple and make the big bucks — without doing any of the work!!! Cheap buggers if you ask me. ” width=”19″ height=”19″ alt=”grin” style=”border:0;” /> — And clueless writters. Just clueless.

    N.

  7. The reason I switched from Windoz to the Mac was precisely because the Mac was able to control the experience from beginning to end. I wanted a tool to do a job – not a machine I had to tinker with when I had to get something done. A computer, phone, camera should all be appliances that “just work.” Apple gets this and I think MS is starting to with the Xbox and Zune.

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