How Apple's Chip Strategy Is Evolving

Some things get better as they age, and Apple's (Nasdaq: AAPL  ) mobile processor strategy is no different. The Mac maker designs its custom ARM Holdings (Nasdaq: ARMH  ) -based A-family of chips in-house, and with the unveiling of the new iPad earlier this week, the company showed that its chip strategy is beginning to evolve.

Setting the stage
Apple acquired small chip shops P.A. Semi in 2008 and Intrinsity in 2010, laying the foundations for it to begin custom-designing its ARM-based chips on its own in the name of good old integration instead of relying on third-party chipmakers.

It still taps contract manufacturers to do the fabricating, as most chip players nowadays are apt to do, and arch-frenemy Samsung currently pumps out A5 chips in its facilities in Austin, Texas.

A brief history of A-chips
The first member of its A-family of chips was the A4 that made its debut in the original iPad in 2010. In characteristic Apple marketing, there was a lot of hoopla over this chip's capabilities and the low-power advantages it boasts by being custom-designed. Apple is one of the few ARM players that really add a layer of differentiation beyond standard ARM cores, so in fairness, credit is due here.

This same A4 chip subsequently found its way into the iPhone 4, fourth-generation iPod Touch, and the second-generation Apple TV set-top box, or STB, that were all released later that year. That means this single-core A4 chip powered four different product lines that were updated or introduced in 2010.

Next was the A5 chip, which was bumped up to dual cores and was similarly introduced in the iPad 2 in early 2011 and then found its way into the iPhone 4S, which was released in October. The iPod Touch released in 2011 really saw no notable upgrades or changes to its processor or otherwise, assuming you don't consider the addition of a white model a meaningful upgrade.

That makes two major products -- the iPad 2 and iPhone 4S -- released in 2011 that run the same dual-core A5.

Chip switches
Fast-forward to this week's event, where Apple took the wraps off the latest and greatest iPad and a new Apple TV STB. While many watchers, including me, were expecting a full-blown quad-core A6, rumors leading up to the launch that Apple was going to use a ramped up A5X chip turned out 100% accurate.

Cupertino opted to use a modified version of the previous chip, with the A5X sporting a dual-core CPU but moving the GPU up to quad cores to handle all 3.1 million of those pixels. Quietly behind the headlines, Apple decided to use a single-core A5 chip in the new Apple TV STB -- an entirely different flavor that's never been used before.

On top of that, many analysts (again including me) expect that Apple will choose to bust out the mythical quad-core A6 in this year's sixth-generation iPhone. Chip analysts Linley Gwennap of The Linley Group and Dean McCarron of Mercury Research both told MacWorld that the A5X is likely to be an iPad-only affair.

If true, this would mean that by year's end Apple would be using three distinct chips for three distinct products, a departure from the single-chip strategy before it.

*Tentative.

The reason this strategy makes a lot of sense is that each product family has very different needs that different processors are better suited for.

Just what the iDoctor ordered
The next iPhone probably doesn't need such graphics horsepower, since it already features a Retina Display and doesn't have nearly as many pixels as the new iPad. The A5 (and probably also A5X) is manufactured on a 45-nanometer process, and Cupertino is probably looking to move the A6 down to 28 nanometers to reap additional power efficiencies.

Apple has long been rumored to soon tap Taiwan Semiconductor Manufacturing (NYSE: TSM  ) as a contract manufacturer. This move hasn't come to fruition yet, but it could potentially someday soon, as TSMC ramps up 28-nanometer production. Apple has allegedly tested A6 production at TSMC, but only time will tell whether this rumor has legs.

Power efficiency is much more important for a smartphone than for a tablet because the device is smaller and can't pack in as large of a battery. The Apple TV is stationary and plugged in, so power efficiency is even less of a concern there, and its fewer uses also means it doesn't need as much processing power as the digital Swiss-army knives that mobile iDevices have become.

Apple is clearly branching out its chip strategy and tailoring chips for its specific products' needs.

The best $400 million I ever spent
With Intel's (Nasdaq: INTC  ) Medfield Atom foray, some have speculated that Cupertino would someday switch to x86 chips for its iDevices, but I find this highly unlikely. A major fundamental architectural change is a tall order to fill, although it's been done in the past. Apple switched Macs to Intel chips in 2006, after all.

iDevices are a different story, though, since they've always been all ARM, all the time. Making the switch would be a nightmare with software compatibility, and Apple's custom ARM-chip strategy is obviously taking off in sophistication.

Looks like that $400 million for those two chip shops was money well spent.

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Fool contributor Evan Niu currently pumps out Foolish Apple articles from his facilities in Austin, Texas. He owns shares of Apple and ARM Holdings, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Intel and Apple. Motley Fool newsletter services have recommended buying shares of Intel and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (9)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 11, 2012, at 9:13 PM, ConstableOdo wrote:

    I like the way you broke down the reasons for Apple using different processors for a particular need. Apple seems to provide just enough processing power for a particular task. Apple is probably saving millions of dollars taking this approach. Tech geeks hate this sort of thinking. The average tech geek would want Apple to put in a quad-core processor across the entire iOS product line whether each device needed it or not.

    I was thinking the same way because I figured it would save Apple tooling costs by producing tens of millions of the same chip despite not all devices needing it. That's just probably overkill to provide devices more processing power than they actually can use. My thinking was flawed because I don't know how to run an efficient business and Apple certainly does. They know where costs can be cut and when it comes to tens of millions of components every penny saved is important.

    I heard some tech geeks cursing at Apple when someone said that they were using A5s with a disabled core in the AppleTV. They labeled them as likely reject A5 chips and they felt Apple was cheating them with slightly faulty parts. That's how tech geeks think. I just chalk it up to Apple getting use out of everything as being cost effective. I think back of Tim Cook saying to spend money as if it were the last penny and that makes great business sense.

    I no longer try to second-guess Apple about its hardware moves. Apple has to make decisions about production components in the tens of millions of units. Any mistake will cost them billions of dollars if the completed product is inefficient or doesn't work as advertised. I trust Apple's judgment because they have so much at stake in trying to please loyal customers. I'm just a single user looking from the sidelines and me attempting to think I know how to run the business better than Apple is just plain foolishness.

    So, if every Android product comes out with a quad-core and Apple uses an underclocked dual-core processor, it isn't going to faze me one bit. If the tech geeks say Apple is behind the curve on hardware, let them say it. Apple is the only company that's really pleasing consumers and also turning profits and that is easy enough to see they know what's necessary and what isn't.

  • Report this Comment On March 11, 2012, at 10:34 PM, techy46 wrote:

    Yea right, let's see Apple stay up with Intel's Atom at 22, 14, 10 and 7nm and Qualcomm's new processor. Microsoft's Windows 8 will allow hardware ODMs to offer a huge variety of devices with off the shelf chips that make smart phones and tablets as power as traditional MACs and PCs. wouldn't bet the farm on a vertically integarted consumer device manuafacturer. Samsung's beating Apple in China with Android OS and ARM chips.

  • Report this Comment On March 11, 2012, at 10:42 PM, JokerJoey wrote:

    Just one other minor point that validates your analysis and Apple's approach: If Apple comes out with its own television, dollars will get you donuts that a newly devised A6 will be integral to that device as well.

    Incidentally, @techy46: Isn't it great that you take the time to troll Apple articles and try to post negative comments? I love guys like you. Samsung and the whole Android mish-mash couldn't compete their way out of a paper bag against Apple. Now go get a life.....please. We'll all appreciate it.

  • Report this Comment On March 12, 2012, at 2:01 AM, xmmj wrote:

    @Author

    It is nice to read a well thought out article for a change - thanks.

    @Odo

    Great points you make there.

    @t46

    With the scores of millions of devices that Apple makes and consumers love, the A-family of chips ARE off the shelf components. It's just that only Apple has access to that shelf. Pretty darn smart.

    BTW - the iPads are once again sold out. Shipping for all models has slipped to 2-3 weeks. I look for 17 M iPads to be sold in calendar Q2. (15M New iPad, 2 M iPad-2)

  • Report this Comment On March 12, 2012, at 12:39 PM, racchole wrote:

    it is true that Intel's chips are far more powerful and useful in the real world.

  • Report this Comment On March 12, 2012, at 10:20 PM, jdwelch62 wrote:

    Good article, Evan.

    But to address some of the other, Apple zealot commentors, let's break down some high-level numbers:

    How many devices can Apple's chips be used in?:

    - iPhones

    - iPads

    - Apple TV STB

    - iTV (when it shows up)

    Now, how many devices can Intel's Atom chips (just one of many products that Intel manufactures) be used in?:

    - Smartphones (various flavors)

    - Tablets (various flavors)

    - Netbooks (don't laugh...)

    - Microservers

    - Digital displays/advertising

    - In-Vehicle Infotainment systems

    - Anything else that needs significant processing power but doesn't need a full-on computer level of processing power (such as a PC, Mac, server, supercomputer, etc)

    @xmmj: Not all consumers "love Apple's products". Check the stats, and you'll find that, worldwide, there are more Android devices than there are iOS devices.

    It's not world hunger, and it's not heart surgery. They're (Apple products) consumer devices that consume content. They don't predict weather patterns or unravel the genome or, for that matter, easily allow you to create content that can then be consumed. Get over it...

    (BTW, I own AAPL, and love what it's done to my bottom line. I just think the zealots need to calm down sometimes. Apple makes gadgets, gadgets that may or may not be in vogue 5 or 10 years from now. Have some perspective...)

    Fool on!... :-)

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