When people compare the latest-and-greatest smartphones from Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH: SSNLF), many tend to focus on very "tangible" aspects such as industrial design and display size and resolution. However, there is an under-the-radar battle between these two smartphone giants that investors may want to watch.
Apple and chips: a winning combination
While the majority of smartphone vendors typically buy applications processors from third parties such as Qualcomm (NASDAQ: QCOM) and MediaTek, Apple designs its own "A-series" applications processor family. So, for example, the chip found in Apple's latest iPhone 5s is known as the A7, and the next iPhone will probably pack a chip dubbed the A8.
There are good reasons for the company to build its own processors. Apple also develops the iOS operating system for its mobile devices, so it can fine-tune the operating system and processor together in order to deliver a good user experience. Furthermore, since Apple also controls the design and specification of its smartphones, it can include the exact functionality needed to support that device.
Samsung has two advantages over Apple
Samsung, too, designs its own processors for its smartphones and tablets. However, Samsung has two critical capabilities that Apple does not currently have in-house: a cellular modem and chip manufacturing plants.
For several generations, the iPhone has housed its A-series processors alongside cellular modems from Qualcomm. Samsung, too, extensively uses cellular modems from the likes of Qualcomm and Intel, but it tries to build its own modems and RF in-house in addition to applications processor under the Exynos brand of chips.
More important, though, Samsung controls the manufacturing process (or "recipe") for the production of its chips, while Apple is dependent on companies including Samsung and Taiwan Semiconductor (NYSE: TSM) for manufacturing technology and services.
The potential advantage that Samsung has in controlling the chip manufacturing, processor and modem design, as well as the final smartphone or tablet product, should not be underestimated.
Apple has this key advantage over Samsung
When Apple launched the iPhone 5s last year, it revealed that the chip inside had implemented ARM's latest ARMv8 instruction set. While this allowed Apple to claim "64-bit" support ahead of its competitors, AnandTech reported that this instruction set added many additional features and resources that enabled higher performance beyond the move to 64-bits.
The move to ARMv8 isn't exclusive to Apple; ARM will happily license chip designers a Cortex A53 and/or a Cortex A57, which implement this new instruction set. For chip designers looking for more control, there's the option of building a custom ARMv8 processor core.
Where Apple has a significant advantage is on the software front. While Google's Android still doesn't offer 64-bit processor support (though it is coming with the next version of Android dubbed "Android L"), Apple has already rebuilt iOS to take advantage of this new 64-bit ARM instruction set.
Additionally, when the next-generation iPhone launches this fall, the 64-bit A7 chip is likely to find its way into whatever smartphone that Apple sells for $99 on a two-year contract, dramatically increasing the penetration of 64-bit iOS devices.
The upshot is that it won't be too long before iOS app developers can just assume that the devices that their apps run on will support the new 64-bit instruction set. It will probably take significantly longer before developers targeting the Android platform (which means Samsung mobile devices) will do the same.
Samsung is a hardware and manufacturing powerhouse that has significant control of the manufacturing of critical smartphone components, including mobile processors. Apple, on the other hand, tightly controls its software ecosystem and the design (but not the manufacture) of its chips.
This battle should be fun to watch, particularly as very compelling cases can be made for why each side is set to "win."