Did Apple Just Set a New Trend?

Apple (NASDAQ: AAPL  ) is currently the largest company in the world as measured by market capitalization. This is neither an accident nor is it unjustified: Apple's profitability more than justifies it. Apple's success is largely due to the company's iPhone product line. While the Android versus iOS debate rages on in Internet forums ad infinitum, the bottom line is that no smartphone vendor has the customer loyalty or the ability to charge a premium in a way like Apple does. One thing that has people excited is that Apple designs its own A-series chips for its phones. The question, though, is whether this is a long-term trend?

Designing your own chips: neither necessary nor for everybody
The truth of the matter is that for smartphones, Qualcomm (NASDAQ: QCOM  ) is already a one-stop shop when it comes to applications processors and cellular modems. For the vast majority of smartphones – including the very highest-end devices from Google/Motorola, Samsung, and HTC – Qualcomm's chips (and, once it rolls out its next-generation, high-end parts, Intel's (NASDAQ: INTC  ) ) are fantastic. In fact, it's very tough in the long-term to beat what a specialized chip company can do (especially ones with multibillion, chip-focused R&D budgets).

However, in the case of Apple – which is, to be honest, a bit of a control freak – designing its own chips makes sense. See, Apple tightly controls its own OS, it controls the application ecosystem, and very often what matters to Apple (high single threaded performance, major focus on graphics) isn't what necessarily matters to the rest of the smartphone ecosystem. So, for example, Apple doesn't need to market "quad cores" so what it did was design two absolutely monstrous cores for its A7 – and from a pure technical perspective this is the right way to go (since Apple doesn't need to play marketing games).

Why this isn't a long term trend, however
While Apple is likely to continue to build its own chips for as long as management feels that it can do with its chips stuff that the merchant vendors can't (or won't), the truth is that the merchant chip space (i.e. smartphone vendors buying parts from dedicated semiconductor houses) is probably going to be the long-term trend. Developing chips is expensive (and getting more expensive each year) and, frankly, there's no guarantee that an in-house solution will be any better than one bought from a dedicated chipmaker.

Further, while Apple has the scale and the profit margins to develop an in-house solution, it's tough to see most of the Android landscape having that (in fact, it's really only Samsung and Apple that control the vast majority of the profitability in the handset space these days). Further, Samsung – with all of its resources (including its own chip manufacturing facilities) – hasn't yet been able to do an internal solution that matches up to what Qualcomm is able to supply. If Samsung hasn't been able to really nail it over all of this time, why would anybody else want to waste money trying?

Foolish bottom line
Apple is a trend-setter, but in this case, Qualcomm, Intel, and perhaps a few others will – on a very long term basis – have the scale and R&D chops to compete profitably in the mobile chip market. However, at the end of the day, building custom chips for smartphones really isn't worth it for the vast majority of smartphone players. And, who knows, in time the merchant chip landscape could produce such compelling products that even Apple won't want to bother with an in-house solution -- although given the strength of Apple's team, this isn't likely for a long time.

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Comments from our Foolish Readers

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  • Report this Comment On December 19, 2013, at 3:54 PM, johnestromjr wrote:

    IF [and when] Qualcomm and Intel DO build a chip that is to Apple's standards then I'm sure it will be looked at. Apple HAS looked at their chips in the past and has passed on them. For whatever reason they don't use them. They may or man not ever use Qualcomm and Intel chips. People [like you?] keep underestimating Apple and keep getting "kicked in the balls" as one competitor commented regarding Apple's use of the A7 64 bit chip. Apple's goal is to produce THE BEST device that gives customers THE BEST experience. That is first and last. Who they buy chips from is secondary to that and if Apple can design in-house and build a better chip that's great. THAT is what separates Samsung, Google and the other Androids from Apple. Apple, one company, still makes the lion's share of profits and really only Samsung is also making a profit. Somehow I don't think Apple is going to beat your door down to hire you since you just don't 'get it'. No shame in that Ashraf, almost no one in the competition does either so you're in 'good' company - so to speak. :)

  • Report this Comment On December 19, 2013, at 4:37 PM, JarJarThomas wrote:

    The point of apples strategy is ... they can easily add a hardware feature wich others can't.

    See the fingerprint sensor.

    They have specialised circuits on the chip.

    Now imagine 3d camera, or other custom additions.

    If apple wants to add such a feature that needs specialised circuits ... no one else can match it that easily.

    And that's why the want the whole chip design in their hands. Becuase only when they can again differentiate enough without the chance that samsung copies the feature easily.

  • Report this Comment On December 19, 2013, at 5:11 PM, makelvin wrote:

    Apple actually did went to Intel and asked them to develop a mobile processor for their iPhone first before they ended up using the ARM architecture. This was in fact one of Paul Otellini self professed greatest regret during his Intel CEO tenure. At the time Paul Otellini could not meet the price target that Apple was asking for. He did anticipated the enormous success the mobile market would become and in hindsight, should have tried harder to meet Apple's demand.

    Afterward Apple turned to ARM architecture for their release of their iPhone for its cost and power efficient architecture. Eventually, Apple decided to developed their own processor mainly because their vision of mobile processor is starting to diverge from the general market's mobile processors. That is they like to maintain high performance computing without sacrificing power consumption.

    This becomes evident when Qualcomm and Samsung start to make their processors with higher and higher number of cores that runs at a higher clock speed to achieve performance at the expense of significantly higher power consumption. Samsung's have even gotten up to eight cores for one of their processors. This became very wasteful in real life practical situation where most of these cores never get fully utilized. Even when these cores are powered down when not in use, they still constitute a noticeable power drain.

    This is the reason why most Android phones with comparable performance to iPhone requires a substantially larger battery just to match a similar battery life usage. In fact, Samsung push for larger screen mobile phone was to hide for fact that they needed the larger area to house their substantially larger battery. But even thought using larger battery can compensate for the higher power consumption of their processors; they also require longer charging time. So in order for them to compensate for the longer charging time, they try to use a bigger charger with larger current to provide faster charging. But due to the chemistry of rechargeable batteries, higher current, fast charging could also result in short overall life span of the rechargeable battery.

    So as you can see, the general market's approach and their vision for mobile processors are very much like design a hot rod where they just slapping on more parts to compensate for the deficiencies of other parts. Apple's vision of mobile processor takes on a more gestalt approach. They managed to design their processor usually at a lower clock speed then its competitors while maintaining and improving the actual performance of its processors and reducing its power consumption. Just look at the evolution of its A-series processors. Their latest A7 processor has doubled the performance of A6 while reducing its power consumption at the same time. This is actually quite an achievement by itself.

    Of course, there are also other advantages such as designing custom circuits within the processor for better encryption and security like they have done for storing their fingerprint biometric information that makes it very difficult for others to hack.

    If and when the rest of industry mobile processor vision aligns with Apple and that it becomes more cost effective for Apple to use other's mobile processor, I am sure Apple would have no problem switching to it. After all, Apple does not sell its chips for use by anyone else. So there is nothing to gain by Apple in maintaining its own chip development when others can provide them exactly what they need.

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