Apple, Imagination and beyond…

There are multiple instances when Apple has shown the way to the industry, with breakthrough innovation in business model and engineering. Challenging the status-quo is embedded in Apple’s culture. By launching iTunes in 2003, Apple created a new business model in music industry. The model was a win-win for all – music companies, customers, artists, and Apple, of course. Then, few years later, with the launch of exciting and appealing iPhone, Apple mostly killed the hegemony of Nokia in the mobile phone industry. The popularity and massive adoption of iPhone encouraged many other companies, existing and new ones, to join the smart phone revolution.

Coming to engineering innovation that also led a race among semiconductor firms, was the introduction of 64-bit smart phone SoC. After the announcement, many other companies followed the suite.

Currently, there is one more such radical change happening. With Apple moving away from Imagination’s GPU, and planning to build its own graphics chip, the former is creating a new trend in backward integration by OEMs. Currently, there are few OEMs, which design their own SoCs in-house, including Apple, Samsung, Xioami, and Huawei; all these companies take architectural license from ARM and design the SoC. Most of these SoCs use an ARM Mali GPU. It is still unclear on Apple’s intentions of moving away from PowerVR GPU.  Is this a strategy to pull down the valuation of Imagination, making it an easy acquisition target? Or is this a move to further penetrate into backward integration by designing the GPU in-house? Whatever might be the case, Imagination may be the losing side.

Let us pick each of the options above and explore the effects of the same.

Backward integration by OEMs into chip design

PowerVR GPUs were being used in majority of Apple’s products till date. With Apple’s intention of building GPU in-house, the licensing revenues of Imagination will reduce substantially. Let us a try to take a bigger picture of this move by Apple, considering backward integration was the prime reason for this. In general, why an OEM digress away from its conventional business model of selling smart phones to end-users, and move backward into activities, which are not its core competencies?

Optimize cost

All smart phone OEMs mentioned above has high sales volume, going into hundreds of millions. With such humongous volume, it makes sense to control your recurring operational cost, which also includes licensing rents and royalty. OEMs have to trade-off between Build vs Buy. In large volume, it is pragmatic to adopt Build strategy, instead of Buy, which will cause a continuous cash outflow. With a one-time, yet high NRE cost, OEMs can design a SoC in-house. Obviously, there will be still some continuous expenses such as engineering resources salaries, manufacturing cost, etc. However, designing a SoC in-house optimizes cost in the long run, as the high NRE cost amortizes over large sales volume. Custom SoCs also reduces BoM cost as only required components are integrated on the SoC.

Competitive advantage

With custom SoCs, OEMs can differentiate their products from those of the competitors. Such differentiation is not possible by using standard off-the-shelf SoCs available in the market. OEMs are close to the end-users, so they know the end-user’s expectations better than conventional SoC design firms. SoC design firms have large overheads, so it makes a good business case for them to design standard SoCs and achieve high sales volume by targeting multiple use cases, markets and applications. Backward integration into SoC design gives flexibility to the OEMs to fine-tune their products to meet customer requirements and differentiate their products from those of competitors. In-house SoC design also enables OEMs to have their custom implementations, suited to their performance and power requirements.

With the recent fallout with Qualcomm on modem licensing revenues, would Apple attempt going into designing modem chips? With my limited knowledge, it may be far-fetched and over-ambitious for getting into modem development. Apple still continues to source from Qualcomm. With respect to in-house development of GPU, Imagination holds the view that Apple cannot design a GPU without violating Imagination’s patents. Let’s see when wewill see Apple products with in-house GPU.

Machine Learning and AI

Machine Learning and AI are now hot trending topics in the technology sector. Companies are still wondering how to monetize these technologies. We will definitely see considerable actions in these fields in the near future. There are endless possibilities of these technologies to be used for various applications such as NLP, Computer Vision, Image recognition, and many more. These applications requires massively parallel computations, which are most suited to run on GPU, rather than hogging the CPU. I believe this maybe one more reason that encouraged Apple to move away from standard GPU, and develop in-house GPU, which are optimized for machine learning and AI. In future, we will see more and more AI features integrated in smart phones. With in-house GPU, maybe Apple is preparing for the future.

Possible takeover of Imagination

This point is more specific to this case, unlike the earlier point, which broadly analyzed the backward integration strategy followed by OEMs. The move by Apple has hit the stock prices of Imagination and few analysts claim that the latter will be loss-making by 2019, after the removing the revenues from Apple. Maybe this is a deliberate move by Apple to shake up the GPU vendor, and then acquire it at a low price. Apple will get access to patents of Imagination, and may continue using PowerVR in its product portfolio.

Should ARM worry?

Assuming that Apple takes over Imagination, should ARM be worried? I strongly believe that with its huge market share, Apple has the strength to influence the semiconductor market. After acquiring Imagination, Apple gets access to MIPS ISA. Currently, ARM is almost a monopoly ISA for smart phone SoCs. However, with a huge market presence and willingness to take bold steps, Apple will be at bargaining table with ARM, and Apple may consider spending millions to make a switch from ARM to MIPS, in its products. Although MIPS ISA has an almost negligible share in smart phone SoC market, with Apple supporting this ISA, things may go against ARM. So, with takeover of Imagination, Apple gets access to PowerVR GPU and MIPS CPU. What do you think about this?

Conclusion

I believe Apple can greatly influence the dynamics of the semiconductor industry. Irrespective of which of the two options Apple takes further, I believe that many other companies in this industry will face the ripples.

I know that things are not as simple, as suggested in the post. I will be overly glad to receive loopholes and improvement areas on this post.