Of vertical integration, supply chain and muscle

Listening to Jamiroquai the other day reminded me of living in Japan in the 1990s. Jamiroquai was a Sony artist, used to promote Sony mini-discs, which recorded in Sony’s atrac music format. At the time I didn’t consciously think of this as a form of vertical integration or ecosystems, which, of course, it was. In the 1990s hardware-centric context of Japan, it seemed, well, natural.

Other device makers went along, and made their own MD players, paying Sony royalties. Sony had PlayStation too. PS still has top position in the high-end segment console market in its home turf of Japan. (Amazing but true – Wii U has outsold X360 in Japan.)

Another Sony attempts at standards – Felica (contactless purchase), Memory Stick, UMD. Felica became the standard for mobile payment in Japan, at least until NFC came. Memory Stick never made it outside of Sony devices.

Why these proprietary hardware standards, successful and unsuccessful alike, are relevant today: it’s well documented how vertically integrated ecosystems are playing out again in mobile. With iOS, handsets, OS, and app/video distribution are vertically integrated. Essentially, this is the console gaming model, with the major and extremely significant difference that Apple makes money on hardware, too, instead of having to rely on software attach to reach profitability. Not for Apple the subsidized home gateway device that is the PS3, for example.

With Android, hardware is not integrated with OS and distribution, although the temporary Motorola acquisition did bring in-house hardware into the Google fold for a window of time. The comparison of iPhone = Mac, Android = Microsoft on the PC has been made (or refuted) elsewhere, although Microsoft didn’t have a chokehold on after-market software and content downloads the way that Google does, with the noteworthy exception of Amazon and other separately operated Android marketplaces.

Did PC makers differentiate on content ecosystems? Not really. Dell competed on a business model. And PCs are not vertically distributed the way mobile phones are in the US. (Imagine buying your computer from your ISP, subsidized with service contract. Would you do that? You most likely do for wireless service.)

So where does this put, say, Samsung or other Android device makers? It’s probably fair to say consumers don’t buy GSx devices for S-voice, for example, despite Samsung’s best and entirely laudable efforts. Vertical integration of components and supply chain can give Samsung an advantage, assuming cross-unit incentives are aligned. And then there’s distribution power. A visit to the Verizon store at 4th and Market brought a telling comment from floor staff – the GS5 had completed sucked the air out of the new HTC M8.

– Jon