Antennagate aside there is an interesting problem that the market is having trouble dealing with. That problem is that Apple’s model, after nearly two decades of thinking it was obsolete, is working pretty damn well.
That model is vertical integration and, up until about 5 years ago, the economies of scale that were connected to horizontal specialization that support companies like Microsoft and Intel appeared vastly superior.

With Apple’s success, folks are questioning that benefit now. Interestingly this change actually parallels a change in computing which historically had been sequential and recently switched to parallel processing which is very similar to the advantage that Apple is demonstrating.

Let’s explore this.

Microsoft/Google/Intel Model: Horizontal Specialization

In a horizontal specialization model a product is built in parts by experts. There can be some parallel work, but the system can’t be built until the parts are ready.As long as nothing changes to quickly or dramatically this seems to be why the Microsoft/Intel/OEM approach has dominated the PC space. Intel and AMD keep specs relatively flat over long (12-24 month) periods of time, Microsoft refreshes the OS about every 3 to 5 years, and the OEMs are given up to 6 months to initially conform to changes and then several years to sell on top of them.

Compared to the cell phone space this is a very leisurely approach to the market.  For instance between the time Windows 7 and the first service patch (which we could call Windows 7.1) comes out next year over a year will have passed.

Between the time Windows 7 came out and today Android has gone from release 1.6 to 2.2.  X86 is held very stable each ARM release (ARM is the processor technology most smartphones use) typically requires you recompile the code related to it and you can get several ARM releases a year.

This has clearly put a huge pressure on vertical integration because there simply isn’t the time needed from when new versions of ARM parts and OSs are put out to do much specialization before the product has to be in market or appear obsolete.

The Dell Streak Example

Take a look at the Dell Streak. It isn’t standard in processor, in size, nor in user experience. All of this specialization couldn’t be started until the core platform products were done. Then it had to go through certification the combined length of that process means it is shipping with the 1.6 version of the Google OS rather than the more current 2.2 version.If they wanted to be timely with 2.2 they would have had to bring out a generic Android phone and only be differentiated on case design, carrier, and the Dell brand. For a company entering this market fresh that would have relegated them to a me-too vendor and one that wouldn’t play well either.  It’s an ugly choice. If you looke at a list of current Android products, the more unique (tablets in particular) the older the OS (some go back aways).

This was no different than we saw with Windows Mobile. Generally the new phones announced after a Windows Mobile platform launch were based on the old platform because it took Microsoft’s partners up to a year to get their part done after the OS was finalized depending on how unique they wanted to be.This has led both Google and Microsoft to set tighter hardware specifications but, by doing so, they effectively make their partners more branded ODMS subordinated to Google and Microsoft who then drive the related designs and the OEMs are willing to give up their independence.

HP/RIM/Apple: Vertical Integration

Vertical integration allows all parts of the phone to be developed in parallel.  In Apple the hardware folks and software folks can start nearly at the same time and work together to assure the result functions.We saw this demonstrated with the Google Nexus One, the now discontinued Google phone and the Microsoft Kin, the now discontinued Microsoft phone. Both vendors were able to get products showcasing new features to market on top of the related platform release but only by breaking their model.

HP after looking at the ugly choice of either being late and differentiated or being close to timely but a me-too vendor decided to buy Palm and vertically integrate themselves.RIM, the only smartphone vendor who is strongly holding Apple at bay, is vertically integrated as well and the ability to develop in parallel has clearly allowed RIM, Apple, and Palm to historically get more up to date phone to market more quickly than companies like HTC, Samsung, Sony Ericsson and LG regardless of whether they are partnering with Google or Microsoft.

Wrapping Up: The Pendulum Swings Back

The current pace of advancement for the Smartphone space is largely driven by how far it currently is behind personal computers in terms of capability.That gap is closing rapidly and, at some point, the speed of advancement will likely slow dramatically. Once that happens the economies of scale surrounding horizontal specialization may return to eclipse the time to market advantages of vertical specialization. But that could take another 5 to 10 years.

Until then, unless the platform suppliers can better integrate the OEMs into their process so that unique products can be built in parallel, the market model is likely to favor Apple, RIM, and HP over Google and Microsoft and that is the unfortunate truth of the Smart Phone market.