When Apple (NASDAQ:AAPL) released the first iPhone, it used a chip designed by Samsung that was built around off-the-shelf IP from ARM and Imagination Technologies (LSE:IMG). Of course, as Apple's requirements grew, it continued to bring on more silicon expertise and has become quite the silicon powerhouse.
With its A6 chip, Apple introduced its very own custom ARM core, and with the A7 it introduced a custom-designed CPU core that not only produced superior performance but was also the first shipping 64-bit ARM chip in the world. With Apple becoming an increasingly powerful chip designer, it should come to no surprise that the company is building its very own graphics processor.
What's the big deal?
The vast majority of mobile system-on-chip vendors license graphics IP from the likes of Imagination Technologies, ARM, and a few others. A few, namely Intel, Qualcomm, and NVIDIA (NASDAQ: NVDA) design their own GPUs, as this not only avoids paying royalties to an IP vendor, but it also allows for a greater degree of customization and flexibility.
When a company licenses off the shelf IP intended to be a "one size fits all" solution, there are obviously certain compromises and trade-offs. For the likes of MediaTek, which is simply looking to integrate a system-on-chip as cheaply as possible, this is fine, but for more "premium" chip vendors this isn't acceptable.
Apple is an interesting player. While its core competency is not the design and manufacture of chips, the company is a stickler about controlling and optimizing just about every part of the design of its products for exactly the experience that it wants to deliver. For example, Apple could easily buy off-the-shelf chips from Qualcomm and call it a day, but instead it goes through the trouble of doing its own cores, layout, and system-on-chip.
The company still uses graphics IP from Imagination Technologies, but recent job postings at Apple have made it very clear that Apple is designing its own graphics processor – in line with the increasing amount of semiconductor customization that investors have seen from Apple over the years.
A potential implication for Imagination
On the surface, this would seem particularly bad for Imagination Technologies (which Apple owns a 9.5% stake in) as the royalties on roughly 200 million units per year between the iPhone and the iPad would fade away. However, the field of graphics processors is highly specialized and, as a result, a patent minefield. Investors got a front row seat to this when Intel coughed up $1.5 billion in royalties to NVIDIA in order for access to its patents (but not its designs).
In light of this, what looks to be a likely outcome is that Imagination ends up licensing its broad swath of GPU patents to Apple so that Apple can more freely design its own graphics processors. This would still probably require a new license for each graphics design, and this would also probably include a recurring royalty stream. So while Imagination's own in-house graphics designs may not be used in Apple chips going forward (look for a custom GPU in Apple's A8 or A9), it will still be there in spirit (and in dollars).
Could NVIDIA benefit?
Interestingly enough, NVIDIA recently made public a broad licensing program for its GPU IP; companies can either license NVIDIA's home-grown GPU cores or it can obtain a license for NVIDIA's patent war-chest so that the licensee can have more flexibility in doing its own designs without worrying about stepping on NVIDIA's toes. It wouldn't be a surprise to see Apple license NVIDIA's patents, particularly as mobile GPUs become much higher performance and are tasked with more "PC-like" gaming workloads (NVIDIA's forte). The announcement of such a deal, however unlikely in the near-term, could be a significant upside driver for NVIDIA's shares.
Foolish bottom line
It has been very interesting to see Apple go from just providing a custom OS and chassis design to becoming a full-on computer designer from the chip to the actual device. Apple's R&D has been rocketing over the last couple of years and it's clear that a non-trivial part of this spending increase has been due to the company's bolstering of its chip design efforts. It's exciting to see what the future holds for Apple's silicon, particularly if Apple's GPU team is anywhere near as good as its all-star CPU team.
Ashraf Eassa owns shares of Intel and Nvidia. The Motley Fool recommends Apple, Intel, and Nvidia. The Motley Fool owns shares of Apple, Imagination Technologies, and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.