Apple aims for more control, less cost as
it accelerates in chip design
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[April 05, 2017]
By Stephen Nellis
SAN FRANCISCO (Reuters) - Apple Inc's
<AAPL.O> decision to stop licensing graphics chips from Imagination
Technologies Group Plc <IMG.L> is the clearest example yet of the iPhone
maker's determination to take greater control of the core technologies
in its products - both to guard its hefty margins and to position it for
future innovations, especially in so-called augmented reality.
The strategy, analysts say, has already reduced Apple's dependence on
critical outside suppliers like ARM Holdings Plc, now owned by SoftBank
Group Corp <9984.T>. Apple once relied heavily on ARM to design the main
processor for the iPhone, but it now licenses only the basic ARM
architecture and designs most of the chip itself.
More recently, when Apple bought the headphone company Beats
Electronics, part of a $3 billion deal in 2014, it ripped out the
existing, off-the-shelf communications chips and replaced them with its
own custom-designed W1 Bluetooth chip.
"Apple clearly got rid of all the conventional suppliers and replaced
about five chips with one," said Jim Morrison, vice president of
TechInsights, a firm that examines the chips inside electronics devices.
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"Today we do much more in-house development of fundamental technologies
than we used to," Apple Chief Financial Officer Luca Maestri said at a
February conference. "Think of the work we do on processors or sensors.
We can push the envelope on innovation. We have better control over
timing, over cost and over quality."
Most vendors of consumer electronics products rely on outside suppliers
for chip design and development, primarily because it is extremely
expensive. That has created huge opportunities for companies like ARM,
Qualcomm Inc <QCOM.O> and Nvidia Corp <NVDA.O>, which have developed
core technologies for processing, communications and graphics that are
used by scores of vendors.
Now, though, Apple is so big that it can economically create its own
designs, or license small pieces of others' work and build on it. As
with ARM and Qualcomm, the actual manufacturing of the chips is still
contracted out to a semiconductor foundry, such as those run by Samsung
Electronics <005930.KS> and Taiwan Semiconductor Manufacturing Co Ltd
<2330.TW>.
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Bringing more of the design work in-house cuts complexity, people
familiar with the processes say. Instead of managing one or more design
teams and then a fabricator, Apple has only to manage the fabricator.
It may also help the company move faster - and save money - as it
focuses on new technologies such as virtual and augmented reality. Apple
CEO Tim Cook has indicated that Apple plans to integrate augmented
reality into its products, which makes 3-D sensors and graphics chips
like Imagination's especially important.
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The Apple Inc. store is seen in Los Angeles, California, U.S.,
September 16, 2016. REUTERS/Lucy Nicholson/File Photo
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Even before formally cutting off Imagination, Apple had given hints
that it was preparing to design its own graphics processors.
Specifically, it introduced a piece of its own code called Metal for
app developers. App developers use Metal to make their apps talk to
the graphics chip on the iPhone.
By putting a piece of Apple-designed code between app developers and
the phone's chip, Apple has made it possible to swap out the chip
without interrupting how the developers work. That could also make
it easier to bridge the gap for developers between the graphics
chips on Apple's phones and its desktop computers, which currently
require some separate coding.
“By promoting Metal instead of relying on other existing standards,
Apple is not only able to control what graphics chip functionality
is exposed at its own pace, but also blur the line for developers
between coding for desktop and mobile GPUs," said Pius Uzamere, the
founder of a virtual reality startup called Ether.
Taking control of the iPhone's chips can also help Apple keep costs
down, which is especially important as it gears up for a
feature-laden new iPhone this fall. Timothy Arcuri of Cowen & Co
said in a research note that he thinks the curved screens expected
on the new phone could add as much as $50 in cost, for example.
Shebly Seyrafi, an analyst at FBN Securities, estimates that the
average price of an iPhone increased only 1 percent to $695 last
quarter, while costs increased 8 percent to $420, resulting in an
iPhone gross margin of 39.6 percent. That is down from the 44
percent average gross margin for iPhones in 2015, according to
Seyrafi's estimates.
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Apple spends only $75 million a year on licensing fees for
Imagination's chips. But licensing fees to chip designers, taken
together, are a significant cost for the iPhone. Apple recently sued
Qualcomm for $1 billion over licensing terms for its communications
chips - which Apple would have trouble designing in-house because of
patent issues.
(Reporting by Stephen Nellis; Editing by Jonathan Weber and Bill
Rigby)
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