Vertical integration vs. specialization
Several months ago Dan Lyons wrote an interesting article on the iPad and the concept of vertical integration. Unlike most computer/laptop/tablet manufacturers that build products using other company's technologies (i.e., Windows and Intel), Apple designed and built the iPad essentially by themselves, down to the chips.
The pros and cons of vertical integration are straight forward. Pros; you control the entire design, cost structure, development and integration, which means you can have a much tighter control on quality, user experience and profits. Cons; you are the sole innovator, while competitive technologies can leverage technology breakthroughs by their partner ecosystem, and their are limited economies of scale unless you achieve mass market share.
This religious debate of vertical integration and technology specialization exists in virtually every market. In the storage industry, EMC and NetApp have held a stranglehold on the market, offering proprietary and high priced devices. Due to their market share and the perception of unmatched value they have managed to create, there is little chance that an alternative company delivering products based on vertical integration could succeed. Hence the rise of technology specialists such as Nexenta that offers storage software that can go on any X86 compatible server (think Linux or Windows on any x86 server for a corollary in the compute market). Other examples include SugarCRM delivering its open source CRM application to its army of cloud partners to take on Salesforce.com's proprietary single vendor SaaS model, and Morphlabs cloud management infrastructure software empowering managed service providers to compete with Amazon EC2 and Microsoft Azure.
Trying to read the tea leaves from the Apple history of vertical integration to decide which model will ultimately succeed is inconclusive. In computers and laptops, Apple has never had a dominant market share, even in the last decade of their rebirth, but in the MP3 player market, iPod is the market force. In addition, while consumers can easily be swayed by image and brand, the corporate buyer will always choose technologies with the highest value-to-cost ratio, even in bull markets. And this ratio is always highest in commodity markets driven by technology specialization.
Tags: cloud computing, saas, technology PR
Posted by Merrill Freund on March 27, 2010 at 3:17 PM
