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.