Vertical Integration and a Teardown Analysis of the iPhone 4S
Posted: November 10, 2011 Filed under: competitive advantage, innovation, technology, theory of the firm, Vertical integration 2 Comments
iPhone 4S Teardown
Last week there was a very useful WSJ article reporting on an analysis of the supplier relationships at the core of the new iPhone 4S (here … while it lasts). This seems like a nice mini-case analysis to see how our theories seem to explain actual outcomes.
They note that Qualcomm “is the big winner” because it is supplying a suite of chips that adds up to $15 per phone. Intel is a loser because it acquired Infineon and then those chips were dropped from the product.
Samsung lost out on the memory chips to its Korean rival Hynix — a surprise since Samsung is known to have a more reliable product. However, interestingly, Samsung did retain its role as the manufacturer of Apple’s proprietary A5 processor which provides the iPhone 4S and the iPad 2 with the bulk of its computing power.
Apple recently vertically integrated the design of this proprietary chip following its acquisition of PA semi. Prior to that, even the design of this most central hardware component was outsourced. While the element of firm specificity is probably greatest in this component, I suspect that vertical integration was not the result of suppliers failing to make specific investments. Also, while intellectual property sounds like it could be a driver, the fact that Apple is suing Samsung for stealing IP in the Samsung Android tablet, makes them an interesting choice for a key partner. Perhaps they did not anticipate this when selecting Samsung. If so, this seems rather short sighted since Samsung has been producing Android phones since 2008.
In any event, the actual business relationships seem, in many respects, much more complex (and interesting) than our theories might predict. More work for us to do perhaps?
StrategyProfs.net 
I do find this type of analysis fascinating. On Hynix, I’m not sure to what extent their chips themselves are less reliable as opposed to their ability to deliver being less reliable. On the acquisition of PA Semi, it may not be a past failure to make specific investments but rather a concern about that going forward, i.e. the next-generation products may require a big investment by the hardware designer in learning about Apple’s software innovations.
All of which is fine armchair speculation but could be way off given my lack of detailed knowledge in this area. For example, if a rival has the potential to raise Apple’s costs by purchasing its key supplier and then holding Apple up in some way, it might pay for Apple to head that off by preemptively purchasing the supplier (you’d have to do a little work but I bet that kind of thing could be described in a formal model).
What I don’t see is anything particularly non-standard about these relationships and how they change. Everything observable is consistent with differences in value drivers and price determining component choices and differences in asset specificity driving the vertical scope decisions. The problem, if any, is that we have too many potential explanations, not too few. A more fine-grained understanding of the case would probably be the best way to sort out the plausible stories from the pack.
My sense here is that Apple is pushing its suppliers to be commodity providers. Apple has shifted the game to user experience (which it controls) and content provision (via App store) while actively de-emphasizing technology bells and whistles. Even the PA Semi acquisition is simply to drive user experience in the mobile space – given that battery life and processing power are going to be differentiators – might as well own that space instead of relying on Intel or ARM processors.