The Dis-Integration of the Computer Industry (late 1980s)
Sometime in the mid-to-late 1980s, the computer industry was transformed from a vertically integrated industry to a horizontally sliced industry. Until the change took place, companies like IBM, DEC and Wang made everything that was needed for the computer right from the chips and the OS, to the application software and having their own sales and distribution. The emergence of the personal computer changed the status quo. Andy Grove takes up the story:
The 10X force came about because technology now permitted putting what before had been many chips on a single chip and because the same microprocessor could be used to produce all kinds of personal computers. As the microprocessor became the basic building block of the industry, the economics of mass production kicked in and manufacturing companies became extremely cost-effective, making the PC an enormously attractive tool in both home and business settings.
In other words, the industry was horizontalised different companies competed for market shares in chips, operating systems, applications and distribution. This 10X force created new leaders in Intel and Microsoft, companies who had been until a short while earlier, component suppliers to the vertically integrated players. The new rules meant competing on the basis of mass production and mass distribution. In this world, the rich get richer. The new rules, according to Grove, of the Horizontal industry: dont differentiate without a difference, the first mover has a true opportunity to gain a time advantage over its competitors, and price for volumes, and cut costs in the process to make money at the new price points.
Its a point made very well by Clay Christensen, Michael Raynor and Matt Verlinden in Skate to where the Money will be (Harvard Business Review, November 2001):
As PCs became good enough for mainstream users, profits flowed from the customers through the assemblers (the IBMs and Compaqs of the world) to lodge in the component makers the operating system maker (Microsoft), the processor maker (Intel), and initially to the memory chip makers and disk drive manufacturers. But as DRAM chips and drives became good enough for the assemblers, the money flowed even further up the value chain to DRAM equipment makers and head and disk suppliers.
Whats different about the places where the money collected and those where it didnt? For most of this period, profits lodged with the products that were the ones not yet good enough for what their immediate customers needed. The architectures of those products therefore tended to be interdependent and proprietary. Companies could hang onto subsistence profits because the functionality of their products tended to be more than good enough, and so their architectures had become modular.
In the late 1980s, the computer industry started to get modularized. The components and sub-system makers thus started gaining influence and disproportionate profits at the cost of the integrators. This modularization is something we are likely to see in the coming years in many hitherto vertically integrated industries, none more so than the mobile phones business.
Tomorrow: The Past (continued)
