Earlier this year Apple announced its intention to move away from the Intel processors in its Macs to its own Apple Silicon chips. The phasing out of Intel chips will begin later this year and if the rumours are accurate, will start with the 2021 MacBook Air. This is the first time Apple will make its own processors for their Mac’s and this is their latest implementation of vertical integration.
What is Vertical Integration?
Over time as tech companies have grown to become the largest firms in the world, they have increasingly engaged in a practice called vertical integration which allows them to grow [further and quicker]. Vertical integration is a strategy that companies use to control their own suppliers, distributors or retail stores in order to control their value or supply chain. Companies can integrate vertically through mergers and acquisitions or research and development; giving companies the opportunity to have full control of the processes related to their operations.
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Current Wave of Vertical Integration
Despite the fierce competition between big tech companies, most of them rely on each other for a particular product or service. Google pays Apple around $7 billion annually to be the default search engine for Safari, Netflix uses Amazon Web Services for its computing and storage needs and IBM recently chose slack as the organisational communication tool. However, tech giants are starting to work towards creating a full solution stack for their customers. The desire to completely own this full solution stack has led tech giants to engage in more vertical integration activities.
Let’s have a look some recent examples of vertical integration in tech:
- Amazon launches its own delivery service in Los Angeles to compete with FedEx and UPS and purchases Whole Foods the year prior.
- Samsung purchases Harman for $8 billion and absorbs Harman Kardon, Infinity, JBL, and Mark Levinson brands.
- Microsoft purchases LinkedIn taking Microsoft a step closer to a vertically connected ecosystem
Vertical integration has its known benefits and drawbacks and is riskier than horizontal integration. You’d think that tech giants would want to stay clear of a strategy that is capable of stunting the growth of a company. Tech giants are starting to outgrow their partners and have strong, established ecosystems. This means that they can cut ties with a partner and create the service or product that their partner was offering themselves. If complementary assets are in place, tech giants usually wait until they can create a superior product or service at a cheaper price. Apple ditching Samsung and Intel to make their own screens and processors is an example of this.
Tech giants have recognised this wave and are starting to react to each other – this has to be a good thing for competition, right? Well, vertical integration can lead to a societal loss in the form of monopolisation of markets and manipulation of prices, which would be detrimental to customers. This wave of vertical integration in the tech sector looks like it could become a continuous cycle; you vertically integrate because you want to grow, however, as you grow there is more incentive to vertically integrate.
