Jason Dedrick and Kenneth L. Kraemer recently received a grant from the Sloan Foundation to expand their research concerning “Who Captures the Value in the iPod and the notebook PC?” The new directions will include studying the distribution of employment in global production networks, extending the financial valuation model, and applying the methodology to other product categories.

Companies and countries are placing emphasis on increasing their innovation activities in order to improve their economic performance and competitiveness. Innovation activities usually are focused on products, with the goal being to create financial value for the firm, its shareholders and home country. Although a lead firm might create a new innovative product, we know that long supply chains are involved in bringing that product to market, and these chains might involve multiple companies and countries in the form of global production and distribution networks. In such complex networks, it is not clear how the financial value that is created by a new product will be distributed among the firms and countries involved.

As an example, consider the iPod, which was the focus of the first phase of this research. The iPod is designed by Apple in California, is assembled by various Taiwanese manufacturers in China, is composed of a variety of components made by Japanese, U.S., Korean and other companies, and is sold by Apple and other retailers around the world. The iPod itself is only part of a broader ecosystem that includes Apple’s iTunes software and its online download store, thousands of record labels, studios, artists and other content providers from all over the world, and a variety of U.S., Japanese, Taiwanese and other companies selling all sorts of add-on products for the iPod.

The question we raised in the first phase of this research is who captures value in such a complex global network of innovation, production and distribution. We looked inside three models of iPods, as well as two notebook PCs, to find out who made what and how much value was captured by the different companies and countries involved. This provided a sample that contrasted the newer, radical innovation of the iPod with the more incremental change found in notebook PCs.

In the iPod case, we found that the greatest financial value was captured by Apple--the brand name vendor who created the iPod, controlled the key standards and organized the broader ecosystem. Significant financial value also was captured by a few Japanese and Korean suppliers of key components. In the notebook case, we found that the greatest financial value was captured by Intel and Microsoft who control the key standards for all Windows-based PC products. The branded PC makers, distributors, retailers and suppliers eke out some financial value. In both cases (notebook and iPod), the U.S. captures the greatest value because the firms that capture the most value are U.S. firms.

In the next phase of our work, we propose to build on these findings to extend the work in new directions. This includes studying the distribution of employment in global production networks. It also includes extending the financial valuation model used in Phase I to examine value capture across a wider swath of the iPod ecosystem and value capture in the dynamic pricing environment that typifies the electronics industry. Finally it includes application of our methodology to other product categories with different business models that might have different patterns of value capture.

For further information regarding this project and others on the personal computing industry, please visit http://pcic.merage.uci.edu.


(CRITO Research Spotlight, February 2008)

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