I recently attended the PFF Aspen Summitt which served to both educate and inspire me, so expect a flurry of blog posts over the next few days. While reviewing my notes during my 24 hour trek back to DC (most of which involved sitting in the
airport) I realized that Eric Schmidt said a lot of interesting things despite my intitial impression that his speech was rather devoid of content. Unfortunately for Dr. Schmidt, most of my conclusions are rather critical.
During the middle of his remarks, Schmidt pointed out that our web-powered world changes conventional thinking about business models and industry integration. In the past, Schmidt observed, vertical integration--buying up assets like, mines, railroads, and mills--cut costs by allowing one company to take a good from raw material to finished consumer good, without the transaction costs of swapping ownership throughout the process.
The wired world is different, he argued, because standards and interoperability make cross-company integration easier. That is to say that so long as we have standards and make things talk to each other, we can have several independent companies acting at all different steps in the process of delivering digital goods and services.
This is an interesting point, and one that I believe that hold some truth, but is this just a guise for a net neutrality argument? Non-neutral nets give network owners the chance to vertically integrate, tying application directly to network architecture features, for example. Is saying that this type of vertical integration is outmoded really true?
Open platforms are a good idea in most cases, but open business models that allow ISPs to experiment with integrated add-on services are also a fine idea. I'm also open to the idea of exclusivity arrangements that allow more revenue to be brought into the net company, allowing it to expand and grow faster. Schmidt might feel differently.
One thing is for certain, Schmidt and Google love horizontal integration, as is evidenced by their constantly expanding buffet of services. Google has purchased countless start-ups to further expand their offerings, as have MSN, Yahoo, and other online service firms. Should the logic of vertical integration be challenged at a time when horizontal integration is on a tear?
Vertical integration is costly and difficult to do well. Paying companies farther down stream is also costly. Regulation, however, is free, or at least the lobbying dollars are cheap compared to the discounts that can be forced from competitors. However, if Schmidt pushes for regulation of vertical integration he may be cheating himself out of future acquisition deals, no matter the direction. Denver