Ben Bajarin is the Director of Consumer Technology Analysis and Research at Creative Strategies, Inc, a technology industry analysis and market intelligence firm located in Silicon Valley.
It’s not every week that two major industry announcements happen that could change the technology playing field forever. But the fact is that the industry is undergoing drastic change and Google buying Motorola and HP killing their tablet and spinning out their PC business is part of this industry change and disruption.
The analysts at my firm Creative Strategies have been observing and analyzing several fundamental market shifts taking place. And there are two I would like to highlight. The first is the trend to vertical integration.
The Google-Motorola Deal and the Vertical Trend
You can segment the technology industry into three major parts: hardware, software and services. Most companies only play in one, and in some cases two, of these segments. Apple, for example, plays in all three business segments. Apple is vertically integrated, meaning that they are not dependent on anyone but themselves to deliver their own proprietary hardware, software and services. Apple controls every critical part of the value chain in order to preserve the experience they believe their customers demand.
(MORE: Google to Acquire Motorola Mobility)
On the surface, Google’s acquisition of Motorola appears to be mostly about patents. However, I believe Google will inevitably get more involved in the hardware business because they understand that by being vertically integrated they have the best shot to compete with Apple in the long term.
By integrating Motorola into their business, Google, like Apple, would also control the hardware, software and services related to their platform. This would allow them greater control of their destiny as well as allow them to be more innovative with products across the board.
There is no guarantee to this strategy though. RIM, for example, is also vertically integrated but is declining in market share. Vertical integration is lucrative if done right. It is disastrous if not done well.
(MORE: The Tragic Decline of BlackBerry)
When HP purchased Palm and webOS, it signaled their intent to become more vertically integrated. Statements from executives highlighted the key point that HP believed they needed to control their own destiny and they needed to own their own software platform to do so.
As I pointed out however, vertical integration is disastrous if not done well, and now HP has decided to get out of the consumer hardware business entirely. A host of things hit HP that led to their exit of the PC business.
The board brought in an enterprise-focused CEO. They could not move fast enough to keep up with the pace of innovation from competition. They couldn’t match costs with Acer or Asus. They couldn’t sell premium PCs because of Apple. This leads to the next major industry trend.
article continues on next page…
Focus On Software and Services
The software and services segment of the industry are by far the most profitable, yielding margins of 50% to 80% on average. Hardware, in contrast, rarely yields margins of great than 10%—unless you’re Apple.
(MORE: Why HP Is Getting Out of the Consumer Game)
For many who know some history of the technology industry, they know that this thinking is what led IBM to exit the hardware business and focus only on software and services. In 2005, they sold off their entire business to Lenovo. It is a strategy I fully expect a number of other companies to begin to employ, as Apple has shown them all that vertical integration is a key to success.
Dell, for example, has been slowly backing off their consumer business. They have shifted resources from consumer PCs to enterprise and IT. Dell, like HP, has a robust services group as well as software, to some extent. I would not be surprised in the slightest if at some point in time Dell also exits the consumer PC business because they are bound to discover the same thing that HP has; to play in the consumer market, you have to invest in and own the entire ecosystem to meet consumers’ needs.
What Does It All Mean for Consumer PCs?
It means new entrants have more opportunities. Companies like Acer, Lenovo, Asus and Samsung, for example, now have a wider opening to gain more PC market share worldwide. But to do so, they too will need to pay more attention to providing complete solutions and ecosystems for consumers.
This is also great news for Apple as turmoil in the Windows PC world will lead more customers to Apple’s door.
The bottom line is that companies are facing this reality of the post PC era in a number of different ways. And the post PC era is already in full swing. Companies who think they can do things they way they used to in this era will continue to face difficult market challenges. It is clear we are entering uncharted territory and companies will need to innovate and take calculated risks if they hope to stay relevant. And, like Apple, if they want to be competitive and really create products that consumers want and will buy, they too may have to employ a vertically integrated approach to the market.
As these industry changes continue, I expect to see more acquisitions, spin-offs or shut-downs. And as the post PC era begins to dominate the consumer computing experience, it will be more difficult for anyone to be a one trick (hardware-only) pony in the future.
Ben Bajarin is the Director of Consumer Technology Analysis and Research at Creative Strategies, Inc, a technology industry analysis and market intelligence firm located in Silicon Valley.
MORE: Why Competing with Apple Is So Difficul