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To: Geoff Nunn who wrote (46951)	6/9/1998 5:05:00 PM
From: Bilow	Respond to of 176388

Hi Geoff Nunn; Yep, I figure that the computer industry is returning to the traditional vertical integration structure pretty much invariably found in large mature industries. My bet would be on HWP as having the eventual advantage. When things are changing quickly, it is better to let each company concentrate on what it does best. But when things stabilize, (as they always eventually do), the advantage returns to the vertically integrated companies (This assumes that the business is big enough to support vertical integration.) A simple example suffices. Suppose that HWP is the company that creates the next price busting system on a chip. (I have no reason to believe that they are or are not in such development right now.) Suppose that the chip is a big success, and allows pricing advantages against the competition. Now. Given that HWP can only produce a limited number of chips, do they give parts to their own internal PC house, or do they sell them? Same with IBM. Here's a question for those who think things have changed forever. Just what is it that causes an industry to be vertically integrated? By the way, all this assumes that the parts count in personal computers will drop drastically. The reduced parts count also tends to reduce the number of companies involved. No matter what anyone tells you, there are frictional losses when one company buys something from another company: Mark ups in price, negotiations, sales and income taxes, secrecy issues regarding quantity and use, import/export stuff, "consignment" problems, etc. This is why vertically integrated companies are able to produce slightly cheaper commodity products. I do not see computers as a commodity yet, but I see the market getting to that point 3 to 5 years from now. What is a commodity? Lets look at cars. If you buy a new car for $18000, you might expect it to be worth at least $10000 18 months or even 2 years later. With the current computer market, it would be worth a lot less. When begin seeing older computers holding their values, it is a sign that commoditization has begun. Another way of looking at this is to take a look at the cost of all the chips in a computer. It has been noted that a sub $1000 PC doesn't have much more than $100 worth of (wholesale) integrated circuits. The (erroneous) conclusion is that the production cost cannot be substantially reduced through the use of higher integration. The error is due to the (ignored) fact that integration reduces the number of passive (i.e. circuit board, caps, resistors, etc.) as well as reducing the amount of silicon. When computers reach a level of integration where you can't reduce the number of active parts (and therefore the number of passive parts) then the prices will soon stabilize at those low values. -- Carl