Apple [NASDAQ:AAPL] is often cited as a model of innovation, leading
BusinessWeek's Most Innovative Companies list every year since it was established in 2005. We know that
design and
cool are key elements of Apple's success. However, the old-fashioned concept of vertical integration is critical to the company's innovativeness.
When Apple introduced the Macintosh in 1984, they controlled all aspects of the hardware, operating system, and software. This focus on vertical integration was the source of ridicule in the early days of the PC, when IBM/Microsoft took Apple's early desktop market leadership and relegated the Apple and its Macintosh to a niche player in computing. However, Apple's focus has always been and remains on the user experience. In the case of the Macintosh, Apple creates and controls the computing experience.
Apple did not create the MP3 player, but by integrating the
iPod, iTunes software, and the iTunes music store, Apple controls the music consumption experience. The fact that they were the first to bring on all the major music labels to the iTunes store concept helped, too. In this case, without owning the music, Apple controls how the music is bought, organized, and played.
According to
Strategic Analytics, Apple became the "World's Most Profitable Handset Vendor in 3Q2009." Apple earned an estimated $1.6 billion in profits on its iPhone handheld device. That is ~$500MM more than Nokia, the worldwide market leader in handsets, earned on handsets in the same period. Your first reaction might be, "of course, their prices are higher, so their profits would be higher, too." But consider the following:
Nokia has 43 models of handsets in the US alone. Apple has ONE. This allows Apple to work with manufacturers to drive the price, and therefore their cost, down. Vertical integration allows Apple to be incredibly profitable as well as innovative.
Late last year, the WSJ (
http://online.wsj.com/article/SB125954262100968855.html) wrote of "executives reviving 'vertical integration,' a 100-year-old strategy in which a company controls materials, manufacturing and distribution." Apple never deviated from this strategy with the Macintosh, the iPod, or the iPhone.
This brings us to Wednesday's announcement of the
iPad, "a magical and revolutionary device at an unbelievable price." [
You have to love Apple's marketing department.] To me, the most significant, yet unheralded part of this launch announcement, is the Apple A4 chip, the heart of the iPad. This chip brings Apple back into the semiconductor business to ensure that they have even more control over the eReading, eMailing, eListening, ePhotoing, eVideoing and other eXperiences Apple wants to innovate. This is one 100 year-old strategy that works today!