Vertical Integration by Software Giants into Manufacturing

(by Bruce Lyons)  To business strategists and industrial economists, as well as competition practitioners, it is interesting to reflect on a recent trend in vertical integration.  Google, Microsoft and even Amazon have been positioning in manufacturing, at least in part inspired by the success of Apple’s integrated business model.  Could this eventually lead to vertical silos that ossify each group’s dominance in segments of software and web retailing?

Google’s acquisition of Motorola Mobility is a partial integration into manufacturing.  It strengthens the commercial position of its Android operating system. The acquisition’s immediate purpose is to add to its patent arsenal in the mobile connectivity war over smartphones and tablets with Apple.  It currently has the incentive to keep independent manufacturers like Samsung and HTC sweet.  However, it might turn out to be more.  With much less publicity, Google has also hired a senior director from Apple, who was previously in charge of Apple’s hardware supply chain.  It is not yet clear whether this signals a direct move into production or some other form of control over manufacturers who use the Android system.  It is not just Google…

Microsoft had a positive experience with its successful Xbox.  It followed up this strategy, at least partially, when exactly a year ago it entered a major strategic partnership with Nokia in mobile devices.   Nokia now uses the Windows Mobile operating system on its new generation smartphones.

Meanwhile, the lower tech internet retailer Amazon has made a big splash with its Kindle and is riding the wave with its Fire tablet.

At the moment, all this looks highly competitive, as each firm brings its strength in one market to wage competitive battle with the others.  Vertical integration is much more likely to be efficient than horizontal integration.  The concern is if markets get foreclosed on rivals.  This does not appear imminent and there can be rapid and dramatic changes in high tech markets.  It remains possible that vertical silos may develop, but it is more likely that entry into mobile connectivity will come from a major new application (e.g. Facebook) or another unforeseen direction.

Postscript.  While on the topic of Facebook, it may be feeling vulnerable to patent disputes. It holds only 56 patents and today finds itself facing an infringement claim from Yahoo.  Yahoo made a similar claim against Google in 2004 and came away with a settlement worth $230m. Facebook is belatedly trying to build its own arsenal with 410 US patent applications.  I am unaware of any essential standards in social networking, so this one may not end up with the competition authorities.

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