Daniel Lyons at Newsweek has an article regarding Apple “returning to a model that most tech companies long ago abandoned – vertical integration.” The news that prompted the Newsweek article is that Apple is using its own proprietary processor for the iPad (the A4.) Of course, to reinforce their thesis Mr. Lyons also calls out iTunes as an example of vertical integration.
The article gets more interesting when an analysis is performed regarding why Apple is oriented toward vertical integration. Beyond noting that one reason is that Steve Jobs a “control freak”, Mr. Lyons then goes into the basic advantages of vertical integration. While not deep in terms of either business nor technical analysis, he does a decent job of calling out the reasoning. I think these lines near the end of this article are the most compelling:
Most people are happy to trade some freedom for the convenience of a device that works seamlessly, like the iPhone. […] But again, most people, myself included, are happy to pay more for what Apple makes. My take is that Apple’s bet on vertical integration, which seems anachronistic, is actually a stroke of genius.
There are basically two reasons for vertical integration: lowering the TCO/ROI associated with a technology and creating an exceptional customer experience. The iPod and iPhone have been successful first and foremost due to the exceptional customer experience delivered with a minimum learning/adaptation curve. While the company at which I work is in a very different technology space than Apple’s iPod or iPhone (we create and deliver a vertically integrated backup appliance), the principles of vertical integration which we follow is the same.