I don't think it's vertically integrated in the classic sense. This isn't oil company buying supplier. It's a tech company building the complete experience including non tech parts. The end result looks more like a company that we wouldn't call vertically integrated. E.g. Uber competes with taxi companies but I don't think we'd call taxi companies vertically integrated.
It may be closer to what is sometimes called the "Whole Product"[1]. In either case, what he's talking about isn't really anything new. And it's not necessarily good for anybody involved either. There are a lot of people, for example, who don't want "Apple style end to end integration" if it means being tied to Apple for everything.
A customer who truly wants "best in class" up and down the stack still wants suppliers to adhere to something somewhat akin to the "Unix philosophy" or the idea of "small pieces, loosely joined".
This "whole product", "full stack", "vertical integration" stuff has a role to play for sure, but let's not pretend like it's some earth shatteringly new strategic idea, or the be all end all.
Yeah I thought about using "vertical integration" but that's a pretty overloaded term at this point. Usually refers to existing businesses buying up suppliers/buyers to control production and pricing. I think "whole product" (from Crossing the Chasm) might also work. Happy to call it something else but I think it's useful to have a word for what's happening.
"Vertically integrated" is strongly tied to physical goods production. A new term (full-stack or whatever) is warranted to include all the software, UI/UX, scaling, social media, etc which are a new part of business; the bit-pushing and user-attention-getting sides.
I do. Coining terms is a great way to drive attention to your product or service. We can fight all we want against the terms "unicorn" and "rockstar", but they have worked to signal things about specific "tech founders" and "computer engineers". Furthermore, using the terminology will work until it doesn't.
What I disagree on is that this is not a new phenomenon. We can actually explain why these companies are winning, it's just that the context is different this time.
...so instead of small and lean businesses (and why not employee-owned too if we're at it), that integrate well with both existing technology and economic landscape, that provide nice integration points both at the business level (partnerships etc.) and technical (APIs made for more than just consumption etc.), let's build startups that fueled by VC money evolve into monolithic monsters that ferociously guard their walled gardens and do their best to entrap customers in them, because ..."nice, polished and integrated and user-friendly experiences"?
Let's at least be frank about it: it's because... PROFIT! ...and OWN the (l)users! ...and to rule the world!
Am I the only one that instead of this, dreams of an utopical business landscape created in the image of the "UNIX philosophy": swarms of small, targeted, few-persons businesses that each solve specific problems and integrate well with one another? And of teaching the customers about the benefits of integrating the best solutions from a large number of boutique providers, all able to provide bespoke solutions for their needs, and all highly motivated to provided the best services because each small customer is really important for them?
Please, stop trying to be "full stack", do what you're best at and learn to integrate with others (yes, integration is really really hard, sometimes even harder than delivering a great product/service, but it's better than forcing the customer to accept a crappy service/product at one level of the stack just because he needs to use the "star product/service" at some other level of your stack). We don't need more Apple-like companies! A few of them are great for setting some quality and "quality of integration" and "polish" standards, but more of them are bad for all!
Unpacking this a bit, I think that the reason full-stack startups are becoming popular is because many of the new technologies are disruptive innovations that honestly aren't that useful to existing customers of industries. That's the definition of a disruptive innovation, right?
Take Uber for example. Their core strength is logistics; they connect instantaneous demand for transportation with surplus supply. They could try to sell this as a service to the existing taxicab/limo industry, but their incentives are seriously misaligned. Taxis and limos have an industry structure that remains profitable because they own a supply-restricted monopoly on transportation (through medallions & branding) that lets each driver charge premium prices. Adopting Uber's technology doesn't let them serve more customers (they're limited by driving time), nor does it let them charge more (it would probably drop the price through higher availability), and so there's no incentive for them to buy it. However, if Uber targets a different population of drivers - say, those who are unemployed or underemployed and have free time on their hands - then those folks all have an incentive to adopt the technology so they could get customers where none were before. And because the supply of Uber drivers is greater than the supply of taxicabs, this lowers prices for customers, creating wealth and a fair amount of Teamster opposition.
Or consider Tesla. Their core strength is branding - they appeal to the eco-friendly, style-conscious customer who wants everyone to know they care about the environment. If Tesla just sold batteries and a powertrain to Detroit, it wouldn't fix the public perception of American cars as gas-guzzling clunkers at all. This is why the public is nowhere near as excited about the Chevy Volt as about the Tesla Roadster or S.
I think that companies that pursue these strategies are effectively attacking longstanding structural efficiencies in the way the U.S. economy works, things that have been institutionalized because that's the way it's always been. And we're going to see more of them in the near future, because this reliance on branding, oligopolies, and regulatory barriers to entry has been in place since the 50s, and technology has changed significantly in that time period. There will also likely be a lot of social upheaval as well, as people get used to the emergence of new institutions.
I wager "disruption" is also underpinning resentment towards gentrification in places like San Francisco.
The negative side of changing how industries and businesses work is that a lot of times those left behind has no more place to go.
Like the auto workers in Detroit or the steel workers in Pittsburgh. They committed to traditional hard work, their organization required hundreds of thousand of them for labor, to protect their interest and to maintain a fair and equitable trade of time/labor they established unions.
In turn the orgs provided care for them all their lives.
We don't have that anymore.
Instead the disruptions coming are just that. Disrupting normalcy and how the establishment are living.
Where do they go? Who is going to carry that burden? The government or the private industry that's capable of leveraging more with less, that's literally killing ways of life for many?
How do you maintain your moral compass in all this? Is this just the march of progress? Does it not bother you because that paycheck will make it better?
You can't stop the progress though. The only good outcome I see is that as technology eliminates more and more jobs, the tax burden goes up higher for the disrupters to pay the retirement for the disrupted.
Yup, new technologies not providing value to the existing ecosystem is the primary issue when it comes to adoption. There's another comment below by pshin45 that discusses how hackers have become more business savvy.
I recently read the book The Wide Lens: A New Strategy for Innovation by Ron Adner that I think is the logical synthesis of these two lines of thought. It totally blew me away because it explains a shit-ton of real world technology adoption success and failures, particularly how innovations interact with their wider ecosystems. Further, it actually provides some examples of how to solve roadblocks by redistributing value among the various players in the ecosystem.
When some technology further up the stack tries to strong-arm control of technology lower down the stack and unilaterally change it for their own sole benefit, it can cause great dissatifaction with other users of the more fundamental technology.
Here's my take - Hackers have simply become more business-savvy. Let me explain...
"Full Stack Startup" is clearly not a new idea, as tptacek mentioned in his comment; just a modern application of an age-old business concept. Rather, I think hackers as a whole have simply become much more business-savvy since the Dot-com bubble, which was obviously a low point in collective business wisdom. As a result, they are increasingly choosing smarter, more sophisticated business models (i.e. vertical integration) and distribution strategies when building their companies.
It also shows that the "disruption" of the MBA is now more or less complete. Business principles and fundamentals will never change (just like human nature doesn't change), but the practice and application of those principles has changed drastically as a result of the Internet, and I doubt MBA curriculums have been able to catch up, simply because most of the people involved don't understand the core technologies driving these changes as well as hackers do.
On the other hand, we've seen the rapid growth in the number, size, and influence of hacker-friendly institutions like Y Combinator, which for all intents and purposes is basically "Business School for Hackers" (let's be honest). YC brings together people who already have a deep knowledge of technology, and helps them make better business decisions while building a strong professional network in the process (the latter of which is cited as the main/only benefit of an MBA). The same goes for hacker-friendly business methodologies like The Lean Startup.
The reason terms like "Growth Hacking" and "Full Stack Startups" become a thing in the first place is probably because they started off as "hacker dialect" for traditional business terms and concepts (Marketing and Vertical Integration, respectively). "Marketing" has for a long time been considered the exclusive realm of MBAs, but obviously that's not the case anymore, and using a term like "growth hacking" was probably a way for hackers to "take back" the concept and make it their own so to speak, though obviously that term has since become severely overused and bastardized.
Interesting view. Essentially a vertically integrated firm from the days of yore plus a new integrated customer experience.
I like how he's thinking not about supply chain integration and customer experience in isolation. Plus, I totally agree with his comment about how this is difficult, but if mastered, provides a hard to replicate competitive advantage.
In other words, these are NOT technology companies. They are regular product / service companies whose founders use their technology know-how to disrupt the marketplace.
Doesn't this type of vertical integration lead to user lock-in after they've displaced the incumbents? And as the companies rise and fall, the broad range of things they had to get good at ends up being reinvented and stove-piped by other companies.
I can't think of any examples of vertically-integrated anything achieving a monopoly in our industry, at least not without going back to IBM in the '50s and '60s.
It seems like vertically-integrated products have the capacity to become strong competitors, since the reason for making such a thing is to deliver a very specific experience. However, by definition such products aren't going to cater to everyone, and thus are unable to take over the market completely, at least not for any length of time.
The iPod is a good counterexample, but it's a not a general-purpose type of product and had a short-lived reign as being the way most people listened to digital audio.
Vertical is a great way to realize a very specific vision for something, but it's a huge impediment to getting majority market share. Done properly though, you can do things your more horizontal competitors simply can't. It can be quite profitable but it won't be for everyone (Mac). The danger is that there's a higher bar that needs to be reached in order to pull it off. You can't assume that third party hardware or software vendors are going to jump on board to add value to your platform.
Horizontal is a great way to insert yourself into a preexisting market, help create a new market, and maybe even get a monopoly on your layer of the stack (Windows). This can also be very profitable. You still can't be everything to everyone, but you can get much closer to that goal. The downside is that being everything to everyone is not always a desirable goal, but now you're stuck with it, because otherwise what's the point of going horizontal? You need your layer to be as general-purpose as possible in order to maximize third-party involvement in the layers above and below you.
You might think of this as the opposite of outsourcing, except these companies do outsource. However, they choose partners with relatively less negotiating power. Uber is an obvious example, but large companies like Apple, Amazon, and Walmart do the same at much larger scale; they can partner with large suppliers as long as they're relatively smaller.
This lets them control the user experience better and, not coincidentally, their own profit margins as well.
(I'm reminded of Gailbraith's theory of countervailing power, that large retailers arose because they had more buying power than consumers when negotiating with suppliers.)
Full stack means better integration between hardware and software and hence a better final product. Apple has been showing us this for years. Their product set has always felt very polished and cohesive.
Plus, technology and programming languages have become very cross-stack friendly. For example: if you know JS you can (with some work) program a server in Node, your Db with Mongo, and client side with straight JS. Yes, there are some complexities but the basics are all the same. Furthermore, development costs for this are way lower than legacy systems that have never heard of aajax or a MVC.
Partly this is driven by the full stack (if you want to call it that) being cheap and easy now. It's becoming commoditized by Amazon, FedEx, etc. Whatever your product is, you can make it globally available (to the developed world at least) with minimal staff and infrastructure.
