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Apple and the Vertical Integration Dance

NEW YORK ( TheStreet) -- What distinguishes today's "device economy" from yesterday's "PC economy" is the tight control brands have over their ecosystems.

Back in the day, long before Y2K, this question seemed settled. Apple (AAPL - Get Report) failed as the sole-source supplier for the Macintosh because it could not scale production to meet demand. Microsoft (MSFT - Get Report) won the market, despite being five years behind with its Windows software, because it gave its partners freedom.

That wasn't the Microsoft brand on your PC, and Microsoft didn't veto applications running on Windows. In fact, when Microsoft made its first tentative effort to control software markets, through its Internet Explorer browser, the U.S. Justice Department swatted it down, tying it up with lawyers who kept Microsoft from doing much of anything interesting for years and years.

China made Steve Jobs' revenge possible. Chinese OEMs could produce plenty of iPods, iPhones and iPads to meet demand, leaving Apple free not only to design as it wished, but to control what it designed.

Now Apple calls the tune and everyone -- even Microsoft -- must dance to it. Microsoft's creation of what Slashgear calls the Xbox Music Service is derided because it follows this trend. My name is on the box, so I control the market the box creates -- that's Apple talk.

The bigger story is what happens before the sale. Apple has created a race toward complete vertical integration. Apple controls the chips, it controls the assembly process, its stores do the selling and that "giant sucking sound" you hear is profit going into its Cupertino, Calif., headquarters.

Intel (INTC - Get Report) has been hit hard by this trend. Device makers prefer the control they get from tweaking ARM Holdings (ARMH) designs to being dependent on Intel chips.

Amazon.com (AMZN - Get Report) is taking this a step further with its reported move to acquire Texas Instruments' (TXN - Get Report) mobile chip division, as reported by The Next Web.

It's a good deal for TI, which can grow faster in markets like embedded chips for cars and power delivered over Ethernet networking systems, than with bulk orders of mobile chips to Amazon. Since it's not selling its foundries, it will still be making money on what Amazon produces. Amazon simply gets control of the design and the design process.

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