History repeats itself or call it Life has come full circle; we are witnessing a new trend of Vertical Integration in Technology Industries.
Some recent news items (2009)
Cisco’s entry into server market
http://www.nytimes.com/2009/01/20/technology/companies/20cisco.html
Apple recruits chip designers
http://www.wired.com/gadgetlab/2009/04/apple-quietly-recruits-chip-designers-for-in-house-cpus/
Intel acquires a software company
http://www.infoworld.com/t/mergers-and-acquisitions/intel-acquires-software-company-rapidmind-651
Oracle acquires Sun
http://www.businessweek.com/technology/content/apr2009/tc20090420_099699.htm
RIM acquires a browser company
http://tech.yahoo.com/news/nf/68569
Google building Operating Systems
http://googleblog.blogspot.com/2009/07/introducing-google-chrome-os.html
Nokia acquires Payment System Company
http://www.thedeal.com/corporatedealmaker/2009/03/nokia_buys_stake_in_obopay_hop.php
Prime View (Kindle Manufacturer) buys E INK
http://www.itworld.com/business/68697/kindle-manufacturer-buy-e-ink
List goes on ...and grapevine says more to come….
Why this is happening?
In early part of the industry evolution, we had vertically integrated industries (like IBM in early mainframe days) with proprietary and interdependent architectures.
Then with time as product functionality and reliability improved, industry shifted to modular and independent architectures and led to the rise of best of breed suppliers like Microsoft (Operating System), Intel (Processors).
Subcomponent industry develops with clear interfaces and best of breed suppliers
.
New product introduction is fast, one just needs to system design the new product. The components can be easily sourced from suppliers for product assembly.
Cost comes down initially as subcomponent suppliers main focus is cost optimization
Unfortunately party cannot go on for ever and few problems have started emerging
• Limit in component level innovation or cost reduction
• Breakthrough innovation is not coming as there are interdependencies across the subsystems and components
• Even if breakthrough innovation comes, it gets copied very rapidly as getting components from suppliers is easy , like iPhone, or eBook reader
So What Next?
Hence comes rise of Vertical Integration and drivers are more than innovation
• Cost and Profitability- As number of suppliers increase in value chain so is their profits (assume each supplier earns 20-25 % gross margin). So why not integrate companies and work on integrated 25-30% gross margin and pass partial benefit to customers
• Innovation – Product level Breakthrough innovation will need optimization and interdependencies across components and subsystems
• Competition – Raising time and other barriers for entry for the competition. Competitors will need time to understand the product and develop internal capabilities to design and manufacture components
• Regulation and Technology grants – Thanks to credit crisis and government stimulus, government is promoting new investments in creating jobs and facilities and also selectively giving grants for R&D programs in new technologies.
• R&D Economics of Scale – By vertical integration , companies can leverage economics of scale in R&D efforts at product level and interdependencies rather than suboptimal utilization and duplication at component level
What will be the Implications?
I wrote earlier about rise of product companies as result of Obama’s ban on outsourcing.
http://pareekhjain.blogspot.com/2009/03/obama-ban-on-outsourcing-and-h1-visas.html
This goes one step further with rise of Vertical Integrated companies. There will be more levers for M&A for both early stage technology companies and established companies
So on one hand vertical integration will accelerate the pace of M&A and on the other hand it will change game from collaboration to competition, as witnessed in recent Google Voice and iPhone controversy
http://www.apple.com/hotnews/apple-answers-fcc-questions/
Earlier leaders had no incentive for vertical integration, as it would have turned their existing partners and customers into competitors and would have led to cannibalization of their existing product line sales. But this is changing now, as evident from Cisco’s bold move…
The best of breed component players will need to think that where they will fit in vertically integration and fierce competition trends. Status Quo will not be the option!!
Saturday, September 12, 2009
Monday, September 7, 2009
Credit Crisis as an Opportunity: Big is getting bigger in Telecom Sector
“Every crisis as an opportunity and so is credit crisis”. I disregarded this as a hollow positive thinking management talk earlier.
There were reports how few companies actually prosper even in great depression. I was taking this with a pitch of salt probably cause and effect fallacy with hindsight bias.
Having said that, I am now seeing first data point in Telecom industry, how big is getting bigger and taking advantage of credit crisis.
Situation
Indonesia Telecom industry is dominated by three players – Telkomsel, Indosat, Excelcom
The market share by subscribers is Telkomsel (51%), Indosat (26%) and Excelcom (22%)
Credit Crisis as an Opportunity
As credit crisis hit, it was difficult for smaller players Indosat and Excelcom to raise money and fund Capex. They lowered their Capex by 50% in 2009 vs 2008
Telkosmel largest player sensing opportunity actually raised its Capex by 25% in 2009 vs 2008
Results
Last two quarter subscribers data is showing while Indosat and Excelcom lost subscribers, Telkomsel is increasing its subscribers in fast growing Indonesia Telecom Market
“Over the last two quarters, Indosat and Excelcomindo, Telkomsel's two largest competitors, have both reported lower customer numbers, with the first losing 3.24m in Q1 and a further 4.4m in Q2 and the second, a rather more modest 1.12m and 220k”
Implications
Big is getting bigger…
So in credit crisis, invest in bigger blue chips…leaders in their industry, who are taking this opportunity and going on aggressive spending mode..
Same thing China is doing , treating credit crisis as an opportunity buying all raw materials of the world and building additional capacity. Chinese companies might give run for their money to companies in other parts of the world later…!!
There were reports how few companies actually prosper even in great depression. I was taking this with a pitch of salt probably cause and effect fallacy with hindsight bias.
Having said that, I am now seeing first data point in Telecom industry, how big is getting bigger and taking advantage of credit crisis.
Situation
Indonesia Telecom industry is dominated by three players – Telkomsel, Indosat, Excelcom
The market share by subscribers is Telkomsel (51%), Indosat (26%) and Excelcom (22%)
Credit Crisis as an Opportunity
As credit crisis hit, it was difficult for smaller players Indosat and Excelcom to raise money and fund Capex. They lowered their Capex by 50% in 2009 vs 2008
Telkosmel largest player sensing opportunity actually raised its Capex by 25% in 2009 vs 2008
Results
Last two quarter subscribers data is showing while Indosat and Excelcom lost subscribers, Telkomsel is increasing its subscribers in fast growing Indonesia Telecom Market
“Over the last two quarters, Indosat and Excelcomindo, Telkomsel's two largest competitors, have both reported lower customer numbers, with the first losing 3.24m in Q1 and a further 4.4m in Q2 and the second, a rather more modest 1.12m and 220k”
Implications
Big is getting bigger…
So in credit crisis, invest in bigger blue chips…leaders in their industry, who are taking this opportunity and going on aggressive spending mode..
Same thing China is doing , treating credit crisis as an opportunity buying all raw materials of the world and building additional capacity. Chinese companies might give run for their money to companies in other parts of the world later…!!
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