Vertical Quality And McNealy: Why Apple, Sun and Google Have It Right.
I have always had to defend my love of the vertical markets, especially to the hortizontal dominated business world. However, in The Register’s send-off for the departed Sun Microsystem’s CEO Scott McNealy, the commentator made an economic comment that hit me so square between the eyes it summed up the entire reason for the need of there to be an Apple, Google, and other one-integrator strategies that have recently come back in to vogue.
Wall Street had long waged war against McNealy’s insistence on Sun as a vertically integrated systems company: one that produces a finished widget. Financial markets prefer to see horizontal vendors, exemplified by Wintel and Dell, because they squeeze the costs out of a business. In reality, the costs are simply transferred elsewhere, usually to the customer in the form of integration woes, shorter buying cycles, and lower reliability.
Think of that when you buy a $500.00 Gateway from Best Buy. It is true that the majority of people who read this blog are the technological heavy-weights, and might not believe they feel all the integration cost and reliability issues that come from the Windows (Is it really Wintel anymore?) ecosystem. However, I don’t go a day without someone complaining about some lost productivity do to their Windows XP workstation, and these are some of the smartest people to be had in a workforce. Coming home to (and using at work when possible) Apple technology has always created longing looks when I show the one step .Mac sync or the bluetooth pairing for my HID devices, or even my ability to direct music to any stereo in my house with one touch.
It’s the same thrill a Google user gets when he shows how his multiple calendars can be subscribed to, synced to his mobile and integrated with his mail. Things that Just WorkTM and Just Work because it’s vertical and integrated. Despite your valid concerns about lock down and other nasty things, the fact remains that as these devices become commodities the network becomes more important and the devices themselves have such a low barrier to entry that one moment you can be iPod + iTunes and the next be Creative + Napster. But, the returns diminish when you become Creative to any music service or Napster to 30 devices.
The same theory extends even to other business markets. A year ago Wired ran an article entitled “The Decline of Brands” stating that because of the more price conscious consumer and knock-off discount brands, that the quality that a large company like Proctor & Gamble implied in it’s Vertical brand strategy would diminish. This is true, but it doesn’t mean consumers aren’t more Vertical minded, in fact they are more so, just not to that level of detail. Sure you may find that a household’s Gillette Bodywash and Febreez has been replaced with Target brand labels, but chances are good they will all be from Target.
Even Java uses the Vertical Market strategy, taking Java and extending it to JEE and JME but with the same integration and quality of what is in J2SE. In the end, it’s the Vertical strategy that will win out as people become as fiercely brand loyal as they were during the American car days of the 1900s. Yes, you had to pay more for Chevy engine parts for a Chevy car, but as the dealers knew you could just as easily get a Ford the next year, prices were high but not exuberant. Also, you always knew it would Just WorkTM and get you to work on time, even if you had to pay the Vertical Market premium.
And that’s the point. Participating in Vertical Markets does tend to be more expensive up front, but the cost isn’t non-existent in the Horizontal model, it’s just more hidden. Perhaps to an America where most people live paycheck to paycheck, a cheap Creative player now may mean you can afford to pay the integration cost in the future the next time you get paid (another cable, another music service, customer support calls, syncing issues, rebuilding the library, upgrading to Vista for that “extra” media ability, ect.) but in the end, you’ll still end up paying just as much, especially if you value your time.
Sadly, before most markets move to the costlier but more quality driven Vertical process, there is always the Horizontal market before prices come down enough so that a person can switch brands, not just components. Steve Jobs and Scott McNealy are both people who never gave in to the Horizontal marketplace, never willing to give in to the quality penalty such a move would give their companies and their reputation.
They have had to live deep in to their middle-life to see it come back, but in the world of PSP, iPod and Google where entire industries have had sprung up around these Vertical ecosystems, they can finally say they never gave up on the idea of quality and integration championing the dull and the mass produced.
April 30th, 2006 at 6:59 pm
Nice to hear there’s still some sense in the world. I couldn’t agree more and I think in the next few years we’ll see more and more from Apple whilst Mediocresoft, Dell etc flounder. One thing I learned in business when I was involved in the flooring market is, its a lot easier to go down than up, whether you’re referring to price or quality and generally once you’ve offered something for a cheap price regardless of the fact it may have been a cheaper product to suit the requirement, it is instantly virtually impossible to ’sell-up’. Todays consumers have been trained to buy on price and seldom look at other factors - but then they’re welcome to their viruses, worms, spyware, need I go on?
May 1st, 2006 at 2:02 am
It’s not a question of horizontal vs. vertical. It’s a question of which one when. Industries evolve and value chains don’t preserve their profit allocations. Vertical solutions are successful when they are not good enough for the job they are hired to do (in Clayton Christensen parlance). Horizontal models are successful when over-service forces the basis of competition to price and customization.
GM, AT&T, IBM, Nokia, all became giants on the basis of vertical integration. They only failed when they had to shift to horizontal models once their products were over-serving. Had they started with a horizontal approach they would have failed.
Microsoft has the opposite problem since it started by providing a component to a solution. It cannot innovate or solve any problem until solutions to that problem have already reached over-service and can be addressed with a horizontal approach. They could afford to wait in most cases. The exception has been Xbox, a division that was initially based on modular, semi-horizontal approach, but, due to market demands, moved to a completely vertically integrated approach (from sourcing the CPU design to writing the games).
Apple, Google have become “in vogue” only because the job they are solving has just emerged as a mainstream need: media/content creation and management, search, etc. Had these jobs not emerged we would still be buying computers for word processing and spreadsheets (i.e. productivity, not creativity). The fact that in media and search Microsoft chose to address a *new* job with a horizontal model designed for *old* over-serving solutions is the reason they failed.