Apple. Microsoft. Google. Facebook. Amazon.
It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Combined, these companies define how we access and experience the Internet, where we get our content and information (and how much we pay), how we manage the digital aspects of our everyday routines, and how we connect and interact with friends and family all over the world.
Not all five of these players compete in every segment, and some focus more heavily in certain areas while others dominate their core industries. This table illustrates many of the numerous places where these five tech giants compete meaningfully.
Consumer technology has split into three primary battlegrounds where this war will be waged. Let's set the stage first before we see how the players fit in.
Hardware and software were traditionally where companies competed, and to a certain extent were frequently considered distinct during the PC era when Windows rose to ubiquity on the backs of a wide range of hardware OEMs. In recent years, there has been an increased trend toward integrating hardware and software, thanks in large part to Apple's incredible success with that strategy. For this reason, hardware and software can now be viewed through a single lens as the value chain reintegrates after years of segmentation.
Content distribution has also become a pillar of competition that serves a critical function for each of these players. Music was the first wave of digital content after Apple launched the iTunes Music Store in 2003, and Amazon followed suit with its MP3 Music Store in 2007. (These companies still dominate with a combined share of roughly 80% of the digital music market.) Since then, content has dramatically expanded into apps, movies, TV shows, e-books, and more. Content is strategically critical to these players as competition has evolved into a platform war and increasing content sales dramatically increases switching costs for users and in turn platform stickiness.
Services play a similar role to content in that their primary task is to increase switching costs for users and further entrench existing platforms. Case in point, companies typically do not profit directly from offering cloud services, since most are offered for free to users. This is despite the fact that there is a heavy investment in infrastructure required to build and maintain these services, primarily in the form of large and expensive data centers.
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The table on the previous page illustrates precisely where each company is targeting. Facebook is trying to focus heavily on the service side with various new social initiatives intended to connect people. Amazon has grown its content offerings immensely over the years and sells hardware at or near cost in order to expand distribution of its content.
Meanwhile, Apple, Microsoft, and Google seek to occupy all areas, with varying degrees of success. Apple has mastered hardware and software integration along with content availability while its services are in need of improvement. Microsoft remains the dominant PC platform and has made inroads with its services while its content needs to be bolstered. Google has become top dog in mobile with Android, but has negligible traction in PCs, even as it has the best services and recently has begun focusing on growing its content repository.
Keep reading to find out where the opportunities lie for each of the Big 5.
During the rise of the PC, the computing value chain became segmented. This was in part because PCs were effectively the only computing form factor and Microsoft's goal of proliferating Windows entailed tapping as many commoditized hardware OEMs as it could. Digital content was not nearly as important or available as it is today, nor was integration among numerous computing devices since smartphones and tablets didn't exist.
With the rise of new form factors in mobile devices, integration among devices has become critically important and content that can be played among various devices has become a crucial aspect of any platform strategy.
Over the span of 15 years, Apple went from near-bankruptcy to become the largest tech company in the world by market cap. It accomplished this amazing feat through its adamant commitment to a vertically integrated strategy on a scale unlike any other tech company.
Over the years, the Mac maker has broadened this strategy beyond mere hardware and software integration and expanded into areas like component design with its A-chip processors as well as sales, distribution, and service with its large network of retail stores.
Microsoft has made it clear that it intends to transform into a "devices and services company," according to CEO Steve Ballmer. That shift represents a distinct departure from its historical business model of selling only software to a very wide range of OEMs and users. In recent years, Microsoft has pursued incremental steps in vertical integration through its own growing network of retail stores as well as the introduction of its own Surface tablet.
Microsoft faces significant risks in pursuing integration since it undermines relations with existing hardware partners. Microsoft is interested in building its own hardware as a new delivery method for its software platform, but these devices will directly compete with those from its partners.
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Even as Android has become the Windows of mobile in terms of ubiquity, Google now owns Motorola, which was once a pioneer in mobile device hardware. Now that the search giant has a hardware subsidiary, it seems inevitable that the company will explore a highly integrated device that can be a compelling alternative to the iPhone.
Like Microsoft, Google also faces integration risks, albeit less significant. Google's core business is search and advertising, in which case it has less profit motive to sell its own hardware and may be better off focusing on platform proliferation instead since most Android devices feed into Google's search and advertising business.
Facebook's integration strategy has nothing to do with hardware. Instead, Facebook seeks to maintain its lead as the dominant social network of choice and the best way to accomplish this is to partner with and integrate its social services into as many existing platforms as possible.
Facebook has now partnered with both Apple and Microsoft in order to score OS-level integration in each company's PC and mobile operating system platforms. Utilizing a cross-platform strategy is critical to Facebook's continued dominance as the largest social network on Earth.
Since Amazon is focused on content, its strategy also hinges on cross-platform integration. This is why the e-tail giant has made its offerings widely available on a broad range of devices beyond its own Kindle and Kindle Fire devices. Amazon has made its Kindle app available on iOS, Android, and Windows Phone, and its Instant Video service is similarly available on numerous platforms and gaming consoles.
The long-term trend toward various levels of increased integration represents immense opportunities for all contenders, as companies seek to be providers of a wide range of computing solutions and services in order to reinforce recurring revenue streams, whether that's continuous hardware upgrades like Apple or increased exposure to ads like Facebook and Google.
Integration is just the first step; no platform can viably compete without content and services...
By entrenching users into any given platform, companies look to create recurring revenue streams from their respective customer bases. The most effective way to create customer lock-in is to dramatically increase switching costs associated with defecting to a competing platform.
Apple, Microsoft, and Google provide the primary platform layer for the vast majority of users on a fundamental operating system level.
acebook and Amazon can be considered secondary platform layer providers since they both pursue cross-platform compatibility in order to ensure broad acceptance of their respective value propositions, even though Amazon has its own mobile platform.
Apple's business hinges on continuous sales of its products that feature integrated hardware and software. The Mac maker offers broad content catalogs as complements to its devices. The company has long said that it operates these businesses slightly above breakeven, so content is not a profit center for Apple.
Instead, it uses content as a method of increasing platform stickiness, since consumers that invest heavily in content are less likely to switch to rival platforms and will become recurring revenue sources through hardware upgrades.
Microsoft has always been a software company and as such seeks wide scale proliferation of an inherently scalable product. The software giant's motivations in offering content and services are largely the same as Apple's, except the primary difference is that Microsoft's products have historically always been software-based.
It still needs recurring sales and upgrades to generate growth, and its unique role in the value chain allows it to enjoy higher margins than OEMs. However, Microsoft lags in content while it now has a wide range of online services like SkyDrive and Outlook.com email.
Google's core business remains advertising, and nearly everything it does contributes to its wide economic moat. The search giant also uses its role as a service provider to gather data on its users, which it can then use to more effectively target ads. The more Google services that a user taps into, the more data Google can garner and the more targeted its ads will become.
This has incredible value for advertisers since working with Google can potentially lead to higher conversion rates. Google has begun heavily focusing on content lately, as indicated by the launch of Google Play in 2012, which consolidated three separate storefronts into one.
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Facebook similarly relies on advertising as its primary business, and to the extent that it can divert users from Google's services it will find success. Like Google, Facebook is privy to a wealth of user data and information that it can utilize for its advertising business. The nature of this data is different though and inherently social.
The company's network effects have reached critical mass, and as such Facebook is not at risk of losing its dominant status. Facebook's content is created by users, but by offering social networking services it can ensure that users stay engaged while reinforcing its ad business.
Amazon is interested in profiting when consumers use its services instead of when they purchase its hardware. The e-tailer positions its content across as many platforms as possible in an attempt to broaden its appeal and keep users coming back for more since it can be accessed anywhere.
In contrast with the other tech giants, Amazon's services primarily relate to e-commerce as opposed to cloud services. Amazon's Prime program is a recurring revenue generator and delivers incredible value to members through prompt delivery times and low prices.
It ain't over yet
Considering the role of content and services in platform adoption and retention, their strategic importance cannot be underestimated. The opportunity to grow these important offerings has monumental implications on the long-term viability of each company's fundamental business.
However, the platform picture is not yet fully complete. Read on for the opportunities of tomorrow.
Over the past decade, computing form factors have expanded beyond just the PC and now encompass smartphones and tablets. This transition is still ongoing and there are massive waves of form factor innovation on the horizon that promise to further reinforce incumbent platforms and provide a new battleground for competition.
The most immediate frontier will be the smart TV. In the early days of the smartphone, the devices weren't all that "smart" and had cumbersome interfaces that users found frustratingly difficult to navigate. The same can be said about early smart TVs. By that rationale, the revolutionary potential of an innovative and simplified TV interface is quite significant, which is why the three primary platform providers are turning their attention to living room dominance.
Apple, Microsoft, and Google have each dipped their toes into the living room in some form or fashion over the years, but nothing near to the potential extent that they could. The Apple TV set-top box remains a "hobby" even as Apple continues to have "intense interest" in TV. Microsoft has a large presence with its Xbox gaming consoles and has expanded the Xbox's capabilities to include more types of content. Google TV leverages Android's success to offer a large number of apps.
The lines that distinguish where content can be experienced have blurred in recent years, and those lines are only going to become even fuzzier in the years to come as content can be beamed directly to a TV, video-centric apps will find their way to the big screen, and TV form factors will become another extension of the ecosystem. This is why TV is such an important opportunity for Apple, Microsoft, and Google.
Further out, there is a trend toward wearable computing. Google is the first mover in this arena with Google Glass, but Apple is experimenting with new device categories like smart watches. Microsoft has also begun building out its patent portfolio related to wearable devices. Even as competition intensifies in existing form factors, there will be entirely new waves of form factor innovation to expand the platform wars in the not-too-distant future.
For the secondary platform layer providers like Facebook and Amazon, the strategy is largely the same. Both Facebook and Amazon should continue broadening their cross-platform reach in order to widen audiences. These new form factors will be incremental opportunities for both companies to connect more people or distribute more content.
In the coming years, the competition will intensify and some victories will come at the expense of rivals while others will not be mutually exclusive. In devices, Apple, Microsoft, and Google will be very much competing directly for a physical presence in consumer households. Facebook's success only threatens Google's in advertising, while it can piggyback on collectively rising platform adoption as a means of connecting more people. Amazon has an unrivaled e-commerce infrastructure in place and will also be able to see cross-platform success.
Ultimately, it will be up to the consumer to determine whom the spoils of war go to.
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Newsletter returns as of January 14, 2014. All other numbers as of October 31, 2013.