The iPad Is Apple's Return to Vertical Integration

Apple's iPad may be the latest and greatest tech gadget, but oddly enough, it also represents a return to a model that most tech companies long ago abandoned—vertical integration.

Apple has designed its own processor, called A4, to power the iPad. That's a big deal because until now Apple has used chips made by others, like Intel (for the iMac and MacBook Pro) and Samsung (for the iPhone). In addition to the processor, Apple also makes its own operating-system software for the iPad.

Moreover, the only way to get apps for an iPad will be to buy them from Apple. Same goes for content. To get movies, TV shows, books, music—or anything, really—you'll have to buy them from Apple's online store, and the iPad itself will be sold only in Apple stores. From top to bottom this is a closed device, completely controlled by Apple.

Is that a good thing? Vertical integration was the norm back in the 1970s with minicomputer manufacturers like Digital Equipment Corp. and Data General, and later on with workstation makers like Sun Microsystems. But pretty much everyone in tech decided long ago that vertical integration was an unworkable model. Why make your own processors and operating system when you can buy chips from Intel and Windows from Microsoft? It was ironic that on the same day that Apple was announcing the iPad, Sun was holding an event to announce the completion of its takeover by Oracle—ironic because Sun's pricey vertical-integration model was a big reason for the company's decline.

Why is Apple defying the conventional wisdom and going vertical? For one thing, its CEO, Steve Jobs, is a control freak and hates relying on others. Also, Jobs has been around long enough to remember the advantages of a vertically integrated company. If the A4 is as good a processor as people seem to think, Apple's iPad will have a big performance advantage over all the other tablet computers that are about to hit the market.

Apple can get an added performance boost by designing its processor and its operating system in tandem so that they are optimized for each other. The company says the A4 runs at 1GHz, which is slow compared to the 3GHz Intel processors used in most personal computers, including Apple's iMac. Yet the iPad appears to be really fast on some tasks, like zooming on a map and then clicking to pull up a "street view" of that location. After Wednesday's event, Apple's demo people said the iPad is so speedy because its software has been optimized for the processor. That also helps explain how the iPad can run for 10 hours on a single battery charge. Either Apple has designed the processor in such a way that it draws very little power, or it has optimized its video software to do the same thing, or both.

Apple's top-to-bottom control over the iPad is already freaking some people out. Free-software advocates, who believe even regular Macs and Windows PCs are too locked down, were picketing like crazy outside the Apple iPad event in San Francisco. They think it's wrong for computer makers to put copy restrictions on movies and music so that those files can only be played one kind of computer and can't be copied and shared freely; and they claim devices like the iPad are just a trap, a way to draw you into a closed world where you can be exploited by Apple. Will regular folks be spooked? I doubt it. Most people are happy to trade some freedom for the convenience of a device that works seamlessly, like the iPhone.

And what of Apple's risky bet on vertical integration? Won't the high cost of going it alone put Apple at a disadvantage compared to makers that buy chips and software from others? Won't those other guys be able to charge less than Apple? The answer is, probably yes. But again, most people, myself included, are happy to pay more for what Apple makes. My take is that Apple's bet on vertical integration, which seems anachronistic, is actually a stroke of genius.

Daniel Lyons is also the author of  Options: The Secret Life of Steve Jobs and Dog Days: A Novel.

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