“Verticalization” is an ungainly word for what has become a highly fashionable trend in the tech world. With Google slapping down $12.5-billion (U.S.) in cash this week to buy Motorola Mobility , the idea just received another big boost. But like many business fashions, there is a risk that this one is about to become an uncontrollable bandwagon – with unhappy consequences.
Until recently, the idea that the best products come from companies that combine both hardware and software expertise under the same roof went against the grain of accepted thinking in technology. The PC era was built on a horizontal model, with different companies supplying everything from the chips to hardware and operating system. That was itself a reversal of an earlier computing era dominated by IBM’s integrated mainframe computers.
It took Apple to bring things back to the future. With the iPhone – and now the iPad – it has gone even further, building out its own chain of retail stores and, through the App Store, corralling the services that breathe life into its devices. With a move into chip design, it has even taken control of the most important component in its hardware.
The idea has been invading the corporate computing market as well, where Oracle’s acquisition of Sun Microsystems last year was seen as a milestone. Combining everything in a single “box” is now seen as a way to increase a technology vendor’s share of a customer’s IT budget.
Not that Oracle initially had designs on being a computer maker. It had set its eyes on owning only Sun’s software assets – particularly Java. But the exigencies of corporate deal-making took over, Oracle was forced to buy the lot, and pretty soon it was claiming that hardware had become a key element of its strategy after all.
There are intriguing parallels here with Google. The search company has been signalling hard this week that it does not have any particular interest in hardware, but is drawn by the defensive attractions of Motorola’s patent portfolio, which it can use to defend the smartphone ecosystem built around its Android operating system from legal attacks. This may be a bluff. Certainly, some of its biggest rivals argue privately that it has just embarked on a deliberate and aggressive attempt to copy Apple’s success in integrating hardware, software and services – with other hardware makers that rely on Android, principally Samsung and HTC, the first victims. But if so, then this should give Google’s investors pause for thought.
Even leaving aside the question of whether a high-margin software and services company should bother itself with the low-profit distraction of hardware, there are significant management and business challenges. As Oracle is finding out, a hard-headed move to slash unprofitable hardware sales can backfire: its share of the corporate computing market has slumped over the past year.
Nor has a vertically integrated approach proved to be a panacea in the smartphone business. Palm’s stumbles over the years, and the troubles of BlackBerry maker Research in Motion, point to the difficulty of mastering all the skills needed to create a hit product. Even Microsoft dabbled in going vertical as it struggled to catch up with the iPod, and later the iPhone – but all it could come up with were marginal products like the Zune music player and short-lived Kin phone.
This warning should be heeded in Mountain View. What Google is best at is being Google – not Apple. With a business model that relies on advertising, it has been free to carve its own course in the mobile world. Whatever the talk of direct rivalry between the two companies, Google and Apple have both been able to prosper so far by following different paths.
Google has at least promised to run the Motorola hardware business at arm’s length. Indeed, when asked whether he would consider spinning off the Motorola hardware business entirely, Andy Rubin, head of Google’s Android division, told me that he has no particular objection to the idea – though he added that it was not something he had studied.
Google’s rivals argue, privately, that such comments are disingenuous and accuse the company of bluffing. The prospect of a Google-made handset running Android software, with a Google search box prominently displayed and deep integration with the Google+ social network, was guaranteed to command the attention of a raft of rivals, among them Apple, Samsung, Microsoft and Facebook.
In the current competitive environment, in fact, merely the spectre of such a device is likely to prompt competitive responses. Further vertical consolidation seems the most likely answer, with a Microsoft acquisition of Nokia the most talked-about deal of the moment.
This could leave Google facing unintended consequences from its Motorola sortie. The horizontal world in which it has thrived will have been pushed faster into a vertical industry structure in which Apple is the best adapted to survive.