July 26, 2010

Why Microsoft didn't get it right until version 3

People used to say that Microsoft didn't get it right until version 3.0 (or 3.11 for that matter). I've had a line of thought that goes something like this on the subject (not entirely polished, so please give feedback).

When a new type of hardware and software combination arrives, a firm that offers vertically integrated solutions (i.e. develops both hardware and software) can initially offer smoother integration and a better user experience than firms in a horizontal ecosystem (i.e. different makers of hardware and software) can. In the 90's and early 00's, that advantage seemed to hold until the horizontal ecosystem came up with a version 3.0 of its software.

In our ever more online world, firms have also been able to connect online services to hardware and software combinations. The best example is probably how Apple combines hardware (Mac, iPhone, iPad), software (iTunes, Quicktime, Safari) and services (iTunes Music Store, App Store) to create a better overall experience.

Another example is how Research In Motion has combined the Blackberry phones with the BBM chat service to create something special that competitors don't offer. One of Nokia's issues seem to be the inability to create a hardware, software and services combination that can compete with the iPhone.

It might be even harder for a horizontal ecosystem to replicate the ease-of-use of a vertically integrated system when it also needs to get the online services right (see Android Market). Especially as major players in the different layers don't fully trust each other, as they've seen how the majority of profits often flow to a few firms (an example being Microsoft and Intel in the PC ecosystem) and few firms want to "take on for the team" to make sure the ecosystem grows strong.


Mats said...

There is a difference in vision too. In a vertical enviroment such as Apple there can be one man , Steve Jobs, who has one vision. In a horizontal enviroment there is a lott of players and it takes time before they gather around som sort of vision.

Sebastian said...

I think you're right, Henrik. A problem with the horizontal ecosystem is that you have a prisoners dilemma (in Game Theory terminology).

As long as everybody else is in line, there's no reason for one of the players not to deviate. To differentiate themselves. If they all do, everyone looses. So, they all end up loosing. It's the most logical outcome.

There are however known solutions to such problems. You have to create artificial limitations. Actually, you have to create a situation that can be detrimental to yourself if you deviate. Only then is it logical for everyone to stay on track and they can be trusted to do so. Breaking the equilibrium.

Very few leaders are comfortable in this way of thinking.

Mats, I'm not sure that lack of vision is the root of the problem. Steve Jobs has to communicate his vision down through lots of people in his organization. As long as you have buy-in, it's not much different from communicating the vision through multiple smaller organizations.

Finally, you have the issue of profit sharing. Consumers may be (arbitrarily) more comfortable paying for one thing rather than another. A vertical ecosystem can take a hit on the cost of certain parts while making it up in other areas.

For example, you could take a hit on the hardware while making it up in software sales. Apple has gone one step further to make sure they even get to share profits with AT&T and third party software developers.

A product like the Xbox would never have been possible if a hardware manufacturer sold the hardware unsubsidized.

To succeed in the consumer space, horizontal ecosystems have to find a clever profit sharing model. This may not necessarily be the case in B2B though.