Apr 282009

Vertical (Dis)Integration

Vertical (Dis)Integration

A couple years ago, Dave Morgan wrote one of the best thought pieces on the future of the newspaper business in his Mediapost column.  Essentially his observation was that newspapers are an outdated vertical integration, and that to survive, smart papers would disaggregate into 5 separate companies and run each one as a separate business, taking on a new life unshackled from the newspaper:  local ad sales (they could own that franchise for the Yelps and Yodles of the world), local content (who better to syndicate local content?), local distribution (no other companies drop something on every doorstep every day), printing (still a business that requires scale), and digital.  It’s just a brilliant idea.

And it’s a shame none of them followed his advice, since they’re all going out of business now.

What occurred to me this week as I’m soaking in the goodness that is my new Amazon Kindle is that while newspapers may need to disaggregate to stay alive, Amazon is slowly amassing a strategy of very clever vertical integration that could well fuel its growth for decades to come.

The Kindle is brilliant vertical integration — it’s the device, the distribution, and the retail model all in one.  And if Amazon is smart, eventually once they have enough market share, they’ll just start doing deals directly with authors and cut out the publishing industry altogether and own the content as well.  They can hit both the long tail (with publishing and distribution costs approaching zero, the risk associated with signing a new untested writer for a revenue share deal are nil) as well as the head (cool place to release your newest book if you’re, say, Steven King).  And at that point, they’ll have a model that should produce an enormous amount of profit for them.

It’s interesting to look at these two situations in parallel — the transition of old media to new media, with one set of losers and a winner, where winning strategies are polar opposites.

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  • http://ben.casnocha.com Ben Casnocha

    The same should happen in the airline industry — reservations, baggage, airplanes, maintenance, flying — these should all be separate.

  • http://intensedebate.com/people/matt_blumber478 matt_blumber478

    That’s interesting.  I wonder if the same could be said of a lot of consumer-unfriendly industries.  Cell phones?  Retail banking?

  • http://intensedebate.com/people/matt_blumber478 matt_blumber478

    Fred Wilson commented by email (Intense Debate didn't work for some reason): i think that efforts to create an open source kindle will eventually (3-5 years) erode that vertical integration

    My response: that may be right, but I bet Amazon will have an incredibly far head start by then on customer base, stickiness, and usability. As long as their business model is customer friendly, they can still maintain their lead, a la Apple with iTunes and iPods.

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