Technology Giants Try to Match Apple’s Success

Over the past couple years, major technology companies have taken steps towards vertically integrating themselves in an attempt to imitate Apple’s success.  In order to manufacture smartphones and television set-top boxes, Google acquired mobile device maker Motorola Mobility.  Amazon created the Kindle Fire tablet to bridge hardware and e-commerce.  Oracle bought Sun Microsystems in order to create integrated hardware and software devices.  Also, Microsoft now makes hardware for its Xbox gaming system.  These are recent examples of technology companies trying to emulate Apple.Read More

Vertical integration is when one company controls end product as well as its component parts.  In the market for technology, Apple has used a vertical model for 35 years.  The key for Apple is its integrated hardware and software.  For example, the iPhone, the iPod, the iPad, and the MacBook have hardware and software designed by Apple.

The main source of Apple envy is its unique ability to control its ecosystem.  Wharton professor Dan Levinthal explains, “It is important to distinguish between a motivation to manage the interface between hardware and software and a desire to manage one’s ecosystem.”  Professor Levinthal believes that many of the moves made by rival technology companies come from their desire to manage their ecosystems.  Apple’s top-down integration allows it to fend off competition through patent lawsuits and to create a seamless user experience in its full line of products.  For example, Apple increased its market share through its “software ecosystem”, which includes 3rd party apps, iOS, iTunes, and other Apple applications.  Since these software applications can be used seamlessly on all of its products, Apple succeeded in enticing consumers to buy only Apple products.

There are a couple of interesting things to take away from this move to vertical integration by other technology companies.  Wharton Professor Andrea Matwyshyn believes that if every technology company followed Apple’s model, then there would be losses in innovation.  Professor Matwyshyn believes this because big vertically integrated firms will dominate the market, which will make it harder for start-ups to develop a breakthrough product.  Another thing to watch is whether Apple will continue to stay ahead of commoditization.  It will be hard to measure these things in the near future, but they will be fascinating to watch in the next five or ten years.

2 thoughts on “Technology Giants Try to Match Apple’s Success

  1. Do you think that the brand of Apple is also playing a large role in creating barriers to entry in the technology market? Many other companies have similar products but do not seem to resonate as strongly with consumers as Apple does. Apple products are usually more expensive than other vendors as well, and still people are willing to buy them over cheaper options. Undoubtedly there are network externalities for Apple products, but does this logically outweigh the opportunity cost of spending more money on a very similar product?

  2. In Apple’s case, vertical integration consists of specifying the hardware “platform” rather than actually manufacturing anything. While Apple can use this to present a consistent “message” to consumers, the hardware itself (at least in computers) is not particularly unique – indeed Apple made a conscious decision when it switched to Intel processors NOT to bundle their machines with Windows, though on an early release I understand that you could actually install one version of Windows and have it run. [That may be hearsay – most machines have a BIOS that lies in between the CPU and the operating system, though it could be that Apple used an existing BIOS as a shortcut to help them get to market quickly.]

    So it’s a little harder to pin down the benefits of vertical integration. In the early days, relative to the “open” architecture of an IBM-derived system, it meant that Apple software was much more stable; you didn’t have to worry if things would run on your machine, whereas you could not take it for granted in the IBM-clone (Wintel) world. It did give Apple a distinct marketing strategy, but it also left Apple vulnerable to hardware innovation that made their machines look outdated or slow or (in notebooks) power-hungry / battery-deficient.

    However, in the battle of dual standards (Wintel and Apple OSX+hardware), Apple has not fared well in terms of market share and other systems (Linux) have a trivial presence. (For the past decade Apple has however been able to hold margins better than Wintel boxes.) Can it repeat that performance, or better it, in pads and smartphones? At present the number of “apps” exceeds that of rivals, but google and Microsoft have deep pockets. Meanwhile, Apple is trying to milk its intial monopoly, and it’s not clear that phone users are dissatisfied with the range available for alternative phones, and as relatively “open” systems Google and Microsoft have the potential to capitalize on new hardware that comes from the outside, and from getting their systems as the core of semi-smart phones.

    The last time around Apple mishandled the growth of rival open systems, in the PC market. Will they do better in phones and pads? Both Google and Microsoft can be patient; smart phones for now are small relative to their core businesses, so they be patient and price for market share. Apple can’t, and the greater the effort of its management to keep profits growing, they more likely they are to end up instead with profits collapsing.

    Does this make sense? In effect the post brings together several separate analytic issues; I’ve only partially unbundled them.

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