Vertically integrate? There was a day when the notion seemed crazy. Apple (NASDAQ:AAPL) was the prime example of what not to do. Microsoft (NASDAQ:MSFT), on the other hand, was the golden standard: Develop software and leave hardware to the others. The strategy helped Windows gain unparalleled dominance as the worldwide standard for PC operating systems, leaving Apple very little hope. Vertical integration clearly didn't work in the tech sector, said conventional wisdom. Oh, how times have changed.
Fast-forward a few decades and Apple is the world's most valuable publicly traded company. Even more, competitors are rushing to do just what Apple did: vertically integrate.
Take Google (NASDAQ:GOOGL). When Google entered the OS business with Android, talk of the Windows-Android analogy sparked. And, sure enough, Android did rise to dominance in terms of smartphone shipments. Android accounted for 79.3% of second-quarter 2013 worldwide smartphone shipments, according to IDC. iOS? An unimpressive 13.2%.
But "...does it matter? Does a unit of market share matter if it's not being used?" Apple CEO Tim Cook asked rhetorically in a recent Bloomberg Businessweek interview with Sam Grobart. Despite for accounting for just 13.2% of second-quarter smartphone shipments and 32.4% of second-quarter tablet shipments, Apple boasted about 55% of mobile web usage in August, according to NetMarketShare.
Cook believes Apple's success in usage is derived from its vertical integration that allows the company to focus on an incredible product experience.
"The key in the post-PC era for having a great product is incredible hardware, incredible software, and incredible services, and to combine them so you can't tell what's what. The magic is at the intersection," Cook said at AllThingsD's 2013 D11 conference this summer.
Going forward, Google looks headed in this direction. In May 2012, Google officially acquired Motorola, getting access to the company's hardware and its existing supply chain. In PCs, Google launched its own OS, Chrome, and even took hardware design in house with its Chromebook Pixel. In phones and tablets, the Google-branded Nexus line is also a prime example of the company's efforts to vertically integrate.
But wait, there's more!
Even Microsoft is looking to vertical integration for the next phase of the company's journey. Though its Surface tablets have thus far been widely regarded a commercial failure with price cuts and the company's nearly $1 billion writedown on Surface inventory, the company insists on forging forward with a new line of Surface tablets.
And Microsoft's recent announcement to acquire Nokia's devices segment solidifies the company's desire for greater vertical integration.
"Bringing these great teams together will accelerate Microsoft's share and profits in phones, and strengthen overall opportunities ... Nokia brings proven capability and talent in critical areas such as hardware design and engineering, supply chain and manufacturing management, and hardware sales," said Microsoft CEO Steve Ballmer in the company's press release.
Sounds a bit like Apple's strategy.
Already in the hardware business, Samsung is looking to borrow a strategy from Apple and design its own processor. Samsung is planning to use a customized version of ARM Holdings' architecture in a future system on a chip, or SoC, design, according to ET News. Though Samsung already manufactures is own processors, they're not based on customized architecture, like Apple's SoCs in its iPhones and iPads.
Apple's in-house chip design gives the company a lead on competitors, Cook told Grobart.
Now, we're well beyond just the surface level of design of hardware and software. We're deep in the guts. This week you saw the A7. You saw our new M chip. Well, these are only possible because many years ago we elected to start building our own silicon team, and now we have many, many people designing silicon.
And you saw us go to 64-bit. Well, why are we able to do that first? It's because we're at that level of being vertical. Does anybody—do these other three companies have silicon expertise? You can answer that. Maybe they have something that I'm not aware of, but in terms of the depth of it ...
What's so great about vertical integration?
The innovation produced at the OS and processor level has "ran its course," Cook told Grobart. Now customers are looking to innovation in the product. It takes a combination of hardware, software, and services to pull this off successfully, says Cook.
So what's the new strategy in tech? Simple: Adopt Apple's strategy. Why not? In the trailing 12 months, Apple's generated $42.6 billionin free cash flow. Clearly, Apple's approach works. And even a small slice of that pie can make a big difference for Google, Microsoft, or Samsung.