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Will Apple Ever Ditch Intel?

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Rumors of Apple (Nasdaq: AAPL  ) wanting to ditch Intel (Nasdaq: INTC  ) for Mac processors have persisted for years. Well, they're persisting again after Bloomberg reported on Monday that the Mac maker is looking to move away from Chipzilla. Transitioning chip architectures is a dauntingly tall order to fill. Will Apple ever ditch Intel?

Been there, done that
Apple has made this transition before, when it switched Macs to Intel chips in 2006. Prior to that, they ran on PowerPC chips made by Motorola and IBM (NYSE: IBM  ) , but those processors eventually fell too far behind when it came to performance. To its credit, Apple made the transition about as seamlessly as possible, with little to no backlash from consumers.

Bloomberg cites three anonymous sources that say that the Mac maker is exploring a similar transition to its own in-house brand of A-chips that currently power iPhones and iPads. These processors are built on ARM-based  (Nasdaq: ARMH  )  designs that boast advantages in power efficiency, while Intel chips still offer the best performance in town.

The case for at least wanting to switch are abundantly clear. Few companies love vertical integration as much as Apple, and the processor is unarguably one of the most crucial ingredients in any computing device. Using in-house chips would increase power efficiency (and battery life), reduce component costs, boost gross margins, and grant Apple more control over its destiny in countless ways.

Swift move
The real question is whether or not Apple's own processors could ever compete meaningfully with Intel's in performance. Today, there's no contest, but Apple continues to make incredible advancements with its chip performance, most notably with the latest A6 and A6X chip.

There are two types of ARM licenses: ones for specific processor cores and ones for architecture instruction sets. Apple uses both of these. Up until recently, we had only seen Apple utilize its processor core license, as the A4 carried an ARM Cortex A8 core while the A5/A5X carried two ARM Cortex A9 cores.

Starting two months ago, that all changed with the A6 running the iPhone 5 and A6X in the fourth-generation iPad. Apple is now using its architecture license to create custom cores, in much the same way that Qualcomm (Nasdaq: QCOM  ) uses its instruction set license to create its Snapdragon mobile chips. The custom cores inside the A6/A6X are powerhouses, offering double the CPU performance of the prior A5/A5X, and Apple is calling them Swift cores.

The A6 outperforms Intel's mobile-centric Atom chips, but likely wouldn't stand up to desktop processors from Chipzilla. Still, with Apple now crossing a new milestone in its chip development, it should continue to see performance improvements, and it's conceivable that it could reach a sufficient threshold within a matter of years to seriously contemplate putting them in Macs.

Don't go there
Apple's love of integration doesn't end with its corporate structure; it also favors component integration wherever possible. Macs have increasingly relied on integrated graphics built into Intel's processors as integrated graphics performance continues to improve, even though it's now tapping NVIDIA (Nasdaq: NVDA  ) for discrete GPUs wherever applicable.

For example, last year's high-end Mac mini models utilized discrete GPUs from Advanced Micro Devices (NYSE: AMD  ) , while this year Apple has ditched discrete GPUs and now uses Intel's integrated HD 4000 in all Mac mini models. All MacBook Airs and 13-inch MacBook Pros similarly use the same integrated graphics.

Two rumors with one stone
Bloomberg stokes another Apple chip rumor that's also been around the block more than a few times, saying that Apple may tap Taiwan Semiconductor (NYSE: TSM  ) for third-party chip manufacturing in its quest to slowly move away from Samsung. The South Korean conglomerate currently manufactures Apple's A chips.

Intel is the exception nowadays as the only domestic chipmaker left that doesn't outsource production. Despite Apple's love affair with vertical integration, don't expect the Mac maker to start building any chip foundries. Even though Apple's capital expenditures are now approaching Intel territory, it'd rather spend those dollars on advanced manufacturing processes for its products.

Apple spent $8.3 billion in capital expenditures last year, short of Intel's $11.4 billion but significantly more than Google's (Nasdaq: GOOG  ) $3.2 billion or Microsoft's (Nasdaq: MSFT  ) $2.5 billion.

Microsoft and Apple agree for once
Microsoft is also pursuing ARM-based chips in the newest Windows platform. Surface RT runs an ARM-based NVIDIA Tegra 3, while Windows RT supports ARM-based silicon from numerous chip makers. Microsoft is covering all of its bases though, as Windows 8 will still run on Intel processors, in part to support legacy x86 apps.

Windows 8 and RT are still new, though, and if RT somehow outperforms 8 in terms of consumer demand, the PC market could slowly migrate toward ARM-based chips instead of Intel.

Ever say never?
PCs remain Intel's largest operating segment at 65% of sales through the first three quarters. In a global context, the Mac remains a small player in unit terms. Apple shipped 4.9 million Macs last quarter, a small fraction of the 87.5 million total PC units. If Apple were to ditch Intel chips in Macs, it would certainly be demoralizing for Intel, but hardly crippling.

It's more important for Intel to hold down its Windows PC fort while trying to penetrate Android in smartphones, since that operating system now runs three-quarters of all smartphones sold. Intel will simply never run an iPhone or iPad, especially considering how far Apple has come with its A-chips.

Bloomberg's sources said any possible transition would be intended to set up Apple for "2017 and beyond." Will this architectural shift ever happen?

Apple's focus on vertical integration is something its rivals are now looking to emulate. Integration has been crucial to the success of the iPhone and iPad in particular, Apple's two most important product families. For that reason, I've produced two bonus reports all about the iPhone 5 and iPad opportunity that are now being included for subscribers of our new Apple research service. Get started by clicking here.

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