By pushing down transaction costs, many business seers have argued, the internet will drive the final nail into the coffin of vertical integration as a business strategy. Companies will become highly focused modules, doing the narrow tasks they’re best suited for and connecting with other specialized modules to form flexible, superefficient supply chains.
So what the heck are we to make of Google? Here we have the ultimate internet firm, and it’s pursuing a vertical integration strategy so expansive that it would make Henry Ford dance with delight. It builds its own server computers as well as designing some of their components, writes its own operating systems, builds and operates its own data centers, owns much of the fiber-optic cabling through which its data travels, codes and delivers a suite of applications ranging from search engines to business productivity programs, sells and delivers ads over various media, operates its own checkout and payments service, writes much of its internal operating software, generates some of the electricity for its buildings, and operates the bus system that brings its employees to and from work. And now we hear of its apparent plans not only to operate a wireless network and make a smartphone but to lay a communication cable across the floor of the Pacific Ocean.
When it comes to the demise of vertical integration and the triumph of specialization, is Google the exception that proves the rule or the exception that proves the rule wrong?