Back in the 1980s, when Microsoft and Intel first started bonding and created what would, for the next two decades, be the most powerful hardware model, it seemed invincible. But for most of the last decade, it has been anything but as companies like Apple, IBM, and even Google have showcased that optimizing around a more traditional approach of vertical integration can be even more successful, and that invincibility has come into question. But like the older vertically integrated model had to be tweaked in order to make it work more efficiently, why wouldn’t the new model need to be updated too? Well, this new relationship between Dell and Microsoft could do that, and were Intel to get in on the deal, things could get even more interesting. Let me explain.
Why Vertical Failed
There were two problems with the vertical model as it existed before the emergence of the PC. The first was that there was no way a company could efficiently make a final product and all of the critical parts for that product. The economies of scale were wrong. Even in IBM’s heyday, IBM still bought and sold parts to other large firms, often competitors, to keep manufacturing volumes up and relative costs down. You needed some optimization, and vertically integrated companies didn’t like to partner with firms they also compete with (they generally still don’t; look at Samsung and Apple).
The other problem was CEO isolation. Typical structure placed the CEO, who had the power to make the big bets, about as far from the customer as you could get in a company. By the time they became CEO, they were typically so outdated on how things were done that they couldn’t help make bad, uninformed decisions. Add to this the fact that they often felt threatened by the younger, better-informed but less experienced folks coming up inside the firm, and you had a real operational problem that was brewing up a cancer-like corporate illness.
The successful vertical company of today knows to pick its fights better. That means they can’t always own every critical part of their solution, and thanks to the Internet and the proliferation of a wide variety of communications tools, it is harder to become isolated (not impossible, though, so that problem isn’t entirely mitigated). The end result is that vertically integrated companies today, at least the well-run ones, are doing far better.
The big benefit of the distributed model that created Intel, Microsoft and Dell was optimization at a component level. You could drive higher performance and lower costs far more quickly. And we as customers benefited as the technology got faster and cheaper at an increasing rate. The big problem was that there was a tendency for the parties collectively to lose track of what the customers really wanted. And there was virtually no ability to drive the technology market except with respect to speeds and feeds. Most markets are benefits-driven and when the vertical players focused back on benefits and full blended solutions, it seemed the distributed players were more interested in resolving, or avoiding, internal disputes with regard to product or solution discussions. Without strong central leadership, the parties were more like a reality TV show of a dysfunctional family, often seeming like they were more interested in pissing the other off than in trying to come up with more a competitive joint offering.
But if the firms can resolve the leadership problem and point all of their resources collectively at the same attractive goal, the inherent financial advantages of the distributed model should, once again, allow them to prevail.
Wrapping Up: Microsoft + Dell + NVIDIA/Qualcomm/Intel
The combination of Microsoft and Dell, even though this is only an investment, places Microsoft in a leadership role. But given that Dell is Michael Dell’s company, this connects the two CEOs more closely. Neither will want what results to fail. While not as formal as the VCE partnership created by EMC, Cisco, VMware and Intel, it has many of the same elements in terms of executive commitment and resources. We still lack one more partym and given where the market is going and Intel’s role in VCE, I’d place that company in the lead to get involved in this. Because they aren’t yet, the door is open for Qualcomm or NVIDIA to fill the slot and the end result would be a vastly changed future client/server/solution landscape, depending on which firms stepped in first.
In short, I think this is just one step in what will be a much bigger move. Whoever takes that next step may redefine who leads and who follows in core technology next time around.