>But I can't find the logic that suggest they cannot be. I can find an example that says they can. IBM.
Yeah but nobody has any idea of IBM's drive profitability or whatnot. But that's a quibble, not a rejoinder. I only have one rejoinder for you.
>And how can you save money by paying 30% margins to buy parts to assemble a product you sell at 15% margins (or no margin at all more recently)?
I think your use of "margins" is far too casual. Gross or operating? Operating margins for most companies in the drive food chain (actually, all companies in general) is usually around 10%, give or take. For that 10%, you get to choose the leading-edge supplier, the low-cost producer, or (if you're real lucky) squeeze someone who's not doing too well and really needs the volume and make them give up their 10%. Not only that, you save all the capital costs of manufacturing and can use it more productively in R&D.
Now, on to gross margins. Gross margins mean absolutely nothing at all in a head/media company. That's because there's so much capital that must be spent to produce those gross margins. If you look at free cash flow, or just compare the depreciation vs the capital investment, I think your opinion might change. This is because CASH must be spent upfront, while the EQUIPMENT COST is amortized over its useful life. Where does this CASH come from?
There's no pot of gold to be had from vertically integrating, just different trade-offs. |
