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From vertical integration to layered structure

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If you look at the launch of new technologies historically, there has often been need for what we call a vertically integrated product to launch that new technology. And a classic example of that is television. The RCA corporation in America in the 20's and 30's and 40's when the TV industry was being launched - you couldn't just sell a television, you needed some programming to make that television have value for you, and you couldn't assume that someone else would make programmes for your television, there were issues of standards, so the easiest solution was to make your own TV's and your own programmes and sell those to the marketplace, so that customers could be sure of watching something on the TV's that you were building. Over time of course the so-called hardware business, the television, and the software business of the programming separated and there was no need for one company to be in both and today no company who makes television sets, primarily Japanese and Korean, do much on the content and programming side, so you go through this evolution of integrated, vertically integrated product to eventually a separated, so-called horizontal integrated product over time.The question of when the split from a vertical structure to a layered structure takes hold is a very important one and it varies across industries, and the reasons vary, for example the split, if you look at the telecommunications business where companies like AT&T of BT or all the European telco's, a lot of them had their own equipment and their own services, they offered a very integrated product, but in America and other places the courts came and said: “That's not going to happen, you need to separate that”, and so, in fact the famous case in America, the break-up of AT&T, they separated the manifacturing and the equipment from the delivery and the service and they made that into a layered market by dictate of the government. In the case of computers, if you look at the personal computer business, what made the shift from the old IBM digital model to the personal computer model was IBM's own decision to do that, and to use Microsoft and Intell. They didn't know it would have that effect, but that's what indeed led to that break. Others have happened more gradually over time, if you look at the automobile industry, the early days of Ford Motor Company, they had steel plants in the Great Lakes and rubber plantations in Malaysia and trains and shipping lines to bring their factories together, they basically did everything themselves. Of course, over 40 or 50 years, they don't do any of those things and they are now done by more specialised suppliers, and that's a model we've seen in the computer business over and over again, that the early mainframes and minicomputers were very vertically integrated products, from IBM digital and others. The personal computer had a separation of the hardware and software, so that Compaq or IBM or Dell would make the box and Microsoft and others would do the software. And that separation, once it takes hold, usually lasts a very long time, until another new technology comes along. And an example of a new technology that is exploiting that vertical capability is of course Apple with the iPod and iTunes combination. That vertically integrated offering of both the hardware and the content was a very successful way of really launching and improving the online music business, but over time you can almost be sure that those will separate, and you won't need iPods, you will need them today, but they will completely separate over time and each will stand on its own, because that's just the way technologies work.

Added on 08 Apr 2017

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