Apple Tests Cheaper and Better Chips, Leaves Buyers in the Dark

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When Apple (Nasdaq: AAPL  ) unveiled the new iPad, the tablet brought some friends along the upgrade path. Some stealthy changes under the hood of older products will both boost Cupertino's profit margins even further and serve as a testing ground for next-generation designs.

The third-generation iPad runs on an Apple-designed A5X processor, based on the same ARM Holdings (Nasdaq: ARMH  ) processor technology as the A5 chip in iPad 2 and the iPhone 4S but with some subtle differences. A beefier graphics system helps the processor manage the 3 million pixels on the 10-inch Retina display. According to the hardware analysis experts at Chipworks, the processor is still made by Samsung using the same 45-nanometer process technology as the A5 or indeed the even older A4.

The star turn everybody missed
With the iPad on stage, it was all too easy to overlook the updated Apple TV set-top box that was introduced the same day. The overall product may not be terribly inspiring, or even that much of a functional upgrade over the previous version, but once you rip the case open to look at the chips inside, things get real interesting.

Credit Chipworks for another scoop as the firm found the A5 -- not A5X -- processor being manufactured on a more advanced process technology. Using Samsung's newer 32-nanometer process with lots of efficiency-boosting bells and chip-shrinking whistles, this A5 chip does the same job as the original A5, but on a 40% smaller chip that uses much less electric power.

And that's not all. The newer, smaller, and less power-hungry A5 processor can also be found inside a small number of iPad 2 tablets. Enthusiast site Anandtech found a few of these in Best Buy (NYSE: BBY  ) stores but was unable to dig them up anywhere else. Maybe Best Buy got first dibs on a test run of the improved tablet, or perhaps that's just the way the cookie crumbled in a random distribution. Either way, you can't tell whether you have the old or the new chip in your iPad 2 without running an app to report what's inside.

That's a win-win-win proposal
So what's the upshot of all this high-tech gobbledygook? Well ...

  • Samsung should be able to make about 75% more chips from the same raw materials when using the newer process. We're talking serious cost savings here, since the cost of a processor is determined by how efficiently you can manufacture it. That translates directly into higher margins for both Samsung and Apple.
  • The smaller chip makes for a significant leap in battery life. Anandtech found a 32-nm A5 outlasting a 45-nm version by as much as 18% in some tests. Show me a consumer who claims that battery life doesn't matter, and I'll show you a liar.
  • Testing the new manufacturing process in a couple of lower-volume products like an older iPad and the hobby-like Apple TV lets Samsung and Apple iron out any kinks in the process and design. Even if the chip architecture is the same, new manufacturing processes always add some risk. This is a very sensible way to manage the transition to a better technology. Intel (Nasdaq: INTC  ) works a very similar strategy in its famed tick-tock development model, and there's nothing wrong with copying plays from the best in the business.

With these trials under its belt, Apple should move to 32-nm manufacturing in a big way fairly soon. Chances are, the 2012 iteration of the iPhone will make the most of the new manufacturing mojo with longer battery life and lower manufacturing costs. The 2013 iPad should follow suit, and perhaps 32-nm chips will replace the older variant in iPad 2 and 3 as we go along.

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Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Best Buy , Intel, and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Intel and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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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 May 06, 2012, at 1:54 PM, bugnuts wrote:

    Why is Anders – a long-time Apple hater – writing on the company? It damages MF's credibility to have this guy on the case.

  • Report this Comment On May 06, 2012, at 4:17 PM, dwilh51183 wrote:

    AAPL should be in everyone's portfolio. aAPL will soon start buying back 5 billion worth of their own stock? Do you think it will go up or down?

  • Report this Comment On May 07, 2012, at 12:18 AM, SimchaStein wrote:

    Great - smaller cheaper uses less power. This allows Apple to deploy an LTE iPhone soon. Note the 4S launched on Oct 4th - 5 months away; and the Apple developers conf is in June.

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Anders Bylund

Anders Bylund is a Foolish Technology and Entertainment Specialist. Where the two markets intersect, you'll find his wheelhouse. He has been an official Fool since 2006 but a jester all his life.

Hypoallergenic. Contains six flavors not found in nature. Believes in coyotes and time as an abstract.

Follow Anders on Twitter, LinkedIn, and Google+.

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