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Apple: Welcome to the horizontal world

It took only a few weeks after Apple started selling the iPhone for smart people to disable the restrictions that forced them to use the device with AT&T's (Cingular's) cellphone service. George Hotz posted how to do it on his blog on Aug. 21. Now, Hotz is off to other things as a freshman at Rochester Institute of Technology. But he has left his mark. Apple disclosed yesterday that nearly one in five iPhones isn't used through AT&T. 250,000 users have mimicked Hotz, grabbed tweezers and soldering irons and cut AT&T out of the equation and signed up with Verizon, Sprint or whomever. The iPhone is well and truly unlocked.

This is a problem not just for AT&T but for Apple, which gets royalties from AT&T for the people who sign up for AT&T service with an iPhone. So: Yet another vertical technology relationship is challenged. Apple has been about about vertical bundling from Day 1. Unlike Microsoft, Apple wouldn't license its operating system for use on anything but Apple computers. Apple's iPod has been all about digital rights management and making sure the music can't get distributed willy nilly. With iPhone, Apple tried to bind users to AT&T. Sun Apple blogger extraordinaire Dave Zeiler notes that some countries are making these arrangements illegal. It's not just the vertical-iPhone model that's under pressure. Amazon and others are stepping up the sales of non-DRM music, forcing Apple to cut the price of its own non-DRM music.

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It's getting to be a horizontal world. From a business point of view, going vertical and restricting vendors and platforms raises profit margins and lends an aura of exclusivity. But going horizontal increases demand and volume. At the right volume, even small profit margins can become very profitable indeed. Horizontal is winning.


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