Apple: A Semiconductor Colossus

[Daniel Nenni]

Mar. 17, 2023 12:10 PM ETApple Inc. (AAPL)NVDA, TSM1 Comment2 Likes

In 2015 I wrote an article titled Apple: Becoming A Semiconductor Powerhouse. In the article, I pointed out that Apple's (NASDAQ:AAPL) product volumes for iOS devices were large enough that the value of Apple's custom processors inside them made the company one of the largest of the "fabless" semiconductor companies. In this article, I offer a new set of calculations that include Apple A and M series systems on chip (SOCs) through fiscal 2022. A conservative estimate of the value of Apple semiconductors for its fiscal 2022 puts it on par with Intel's (INTC) fiscal 2022 company revenue.

Why I decided to revisit the Apple-as-a-semiconductor company calculations​

Apple Stock: A Semiconductor Colossus (NASDAQ:AAPL)

Apple has become a semiconductor colossus rivaling the largest in the industry. Click here to read why I remain long AAPL and rate it a buy.

seekingalpha.com

 

[Daniel Nenni]

I follow Mark Hibben. I think he provides an interesting outsiders perspective on TSMC and Apple:

Investor takeaways: Apple's new paradigm is the quiet revolution
If the reader is surprised or even shocked by the results of this analysis, perhaps it's because Apple's new semiconductor paradigm has been largely ignored by technology analysts and many tech investors. Even now many analysts continue to champion traditional semiconductor companies such as Intel and AMD (AMD).

The Apple business model is the new paradigm. Apple designs its semiconductors but relies on TSMC to fabricate them. Apple maintains no fabrication capability whatsoever.

But this is only part of the new paradigm. Apple doesn't sell its semiconductors to others, as a merchant semiconductor vendor in the classic Intel mold. More to the point, Apple's semiconductor design is tightly integrated with its overall product design, including software and operating systems.

This tight integration of hardware and software design has yielded personal computing devices that are usually easier to use, more energy efficient, and more powerful than competing systems. In addition to increasing the appeal of its products, Apple's vertical integration reserves profit to the company that would otherwise go to outside vendors.

While one might dispute the particulars of this analysis, I don't think there's any disputing the general result. Apple has become a semiconductor colossus rivaling the largest in the industry. I remain long Apple and rate it a Buy.

 

[semicomposer]

Apple's chip design business if it will only ever be used to supply itself shouldn't be worth anything as a semiconductor business, but rather the benefits and risks of being inextricably linked to Apple's product/device businesses would be transferred to the latter.

If Apple started selling its chip design to other device/product makers then it would (1) generate independent, extricable value, but (2) Apple's device/product business would lose its differentiation (both real and perceived), lose market share and lose value. You can't have it both ways.

But this is avoiding the most important attribute of Apple. It's first and foremost a marketing company. Its products don't have any real edge, but its marketing does. The latter is also more durable with the appropriate investment. The bitten apple logo is the ultimate (and if I may say, beautiful) representation of rebellion for the sake of productive and profitable creativity.

 

[Daniel Nenni]

Here is the critical point:

If there is significant software involved, which there usually is for complex SoCs, developing the software and silicon in concert is a significant competitive advantage in regards to capabilities and time-to-market. This is why chip only companies should be concerned. Cloud companies are already there. Microsoft is already there. Automotive companies will now do their own silicon for the software integration. What industry is next?

General purpose SoCs and CPUs beware! Bespoke silicon is coming, absolutely.

 

[Paul2]

Apple's device/product business would lose its differentiation

No, it wouldn't, why? It barelly matters to buyers what's inside, as long as it's fast.

To most Mac buyer, the only difference been "icons in the centre, vs. icons in bottom left"

Apple never grew as fast as during years when they used off the shelf Samsung, and Intel chips.

 

[Paul2]

There are much less cookie cutter SoC makers today than there were 10-12 years ago. And those who still are there don't see the need to do expensive custom cores for little gain.

If this is to change, we'll see not much change in already melting market share of "differentiated" smartphone makers like apple.

 

[semicomposer]

No, it wouldn't, why? It barelly matters to buyers what's inside, as long as it's fast.

I don't mean Apple products would lose all their differentiation if Apple sold its chip design to 3rd Parties, but it would lose part of it. And the gain from selling chips would need to be netted with the loss in product sales. Would the net, net change positive or negative? The answer to that depends on both when and even where.

Look at the trend in Apple's iPhone market share in CHINA and how that differed with its market share in the US since its launch to see the confluence of factors that effected its business. If you can ascertain the factors and prioritize the importance of said factors (which is harder), then one understands Apple's success (or however you want to qualify it).

Meanwhile, with American consumers it's certainly not mainly about the visual aesthetic or the user interface differences even though some consumer say it. You think that American consumer you patronize has the option to choose a high quality, low cost phone from a China manufacturer?

It barelly matters to buyers what's inside, as long as it's fast.

I agree and disagree with this. I'm talking about for the mass market here since that's what's most important for Apple. Yes, how fast matters as do other specifications. But "as long as it's fast" is missing the mark by a mile here. I've never ever heard a mass market consumer who (1) was contemplating buying an Apple laptop and ones she viewed as the best alternatives; (2) then choose a non Apple laptop; (3) and then say, "this laptop is not fast enough for me." Never. Not once did a human being say that.

 

[Paul2]

I agree and disagree with this. I'm talking about for the mass market here since that's what's most important for Apple. Yes, how fast matters as do other specifications. But "as long as it's fast" is missing the mark by a mile here. I've never ever heard a mass market consumer who (1) was contemplating buying an Apple laptop and ones she viewed as the best alternatives; (2) then choose a non Apple laptop; (3) and then say, "this laptop is not fast enough for me." Never. Not once did a human being say that.

Because Apple is marketing to technically unsophisticated buyers — and it is the genius of their marketing strategy.

Pretty much everybody before them was marketing computer things only to computer people, and seen no significant market outside of it, despite roaring signs for the contrary.

 

[semicomposer]

Good point. And Jobs and Apple didn't perfect its mass market offering until after Jobs return in ~1996. Apple's initial products weren't mass market ready and were best suited for earlier adaptors. Apple's 1984 Super Bowl commercial was maybe its most successful mass market initiative during Jobs first tenure.

And then Jobs' business model for NeXT showed he certainly hadn't figured out the mass market business model (and I don't want to over simplify that because there are certainly, as always, several reasons).

Maybe through his investment in Pixar and their work on Toy Story, which was released in 1995, Jobs gained the final piece he needed to master the human nature of the mass market. But certainly as this 1996 internal speech shows, he had developed belief and insight into what matters most for the mass market. And in Jobs own words from 1996 (!) about reviving Apple's success: "The way to do that is NOT to talk about speeds..." Hint, Hint.

Steve Jobs shares his approach to marketing - 1996 Internal Speech

 

[Markwrob]

Daniel, i have a few points to follow up here.

Apple's success to this stage is driven by their excellent marketing to tech unsavvy folks (as noted by others) coupled with owning enough of their hardware to craft good-enough performance and good-enough efficiency to satisfy its customer base. They have incorporated top notch groups like PA Semi to do so, but have resisted most urges to build the 'perfect' chip. Instead they tune the overall system to meet their goals. They can do all this more easily since their systems are closed proprietary ones.

If car makers wish to do this, they will need to focus quite closely on their electronics packages. Given that Ford and GM for example allowed their in house electronics teams to wither if not die, I don't expect them to mount big pushes to craft custom electronics. They will continue to use industry standard chips, protocols, etc. That leaves some room for third party suppliers to make some moves, subject to the pressure to be profitable--which means they will also tend to stick to standard high volume products and stay away from custom approaches.

The standards based approch has its pros and cons. The proprietary approach has its pros and cons. Apple has figured out how to make the latter scheme work well for them. The car manufacturers use the former plan to stay above water mostly, up to now. Does big auto have what it takes to survive the electrification surge? I think it will still take many years to know.

 

[Daniel Nenni]

Daniel, i have a few points to follow up here.

Apple's success to this stage is driven by their excellent marketing to tech unsavvy folks (as noted by others) coupled with owning enough of their hardware to craft good-enough performance and good-enough efficiency to satisfy its customer base. They have incorporated top notch groups like PA Semi to do so, but have resisted most urges to build the 'perfect' chip. Instead they tune the overall system to meet their goals. They can do all this more easily since their systems are closed proprietary ones.

If car makers wish to do this, they will need to focus quite closely on their electronics packages. Given that Ford and GM for example allowed their in house electronics teams to wither if not die, I don't expect them to mount big pushes to craft custom electronics. They will continue to use industry standard chips, protocols, etc. That leaves some room for third party suppliers to make some moves, subject to the pressure to be profitable--which means they will also tend to stick to standard high volume products and stay away from custom approaches.

The standards based approch has its pros and cons. The proprietary approach has its pros and cons. Apple has figured out how to make the latter scheme work well for them. The car manufacturers use the former plan to stay above water mostly, up to now. Does big auto have what it takes to survive the electrification surge? I think it will still take many years to know.

I use Apple and I consider myself tech savvy but yes Apple is easiest to use if you just need to get by. It is also the most powerful mobile ecosystem in my experience. I have also worked with Apple on different chip projects since they came to TSMC. There is a chapter on Apple in our Mobil Unleashed book which details their journey to SoC dominance.

https://semiwiki.com/books/Mobile%20Unleashed%20-%20front%20to%20back.pdf

There is also a chapter on QCOM, I have worked with them as well, same with MediaTek. So, again, my insiders view will not jibe with others.

Car makers are already doing this. We saw Tesla on SemiWiki a few years back and now we see all carmakers. I know what is going on inside Tesla, the other companies I do not, but I can assure you they will follow Tesla into the chip world. They have no choice if they are developing software that will run on the cars.

On a side note, as I was leaving my favorite lunch spot last week, a Tesla pulled up to us in the parking lot. We paused to let it go by but it didn't move. We then noticed there was no driver. We were not comfortable walking in front of a driverless car so we went around. The owner was behind us laughing, he summoned his car.

 

[cliff]

Here is the critical point:

If there is significant software involved, which there usually is for complex SoCs, developing the software and silicon in concert is a significant competitive advantage in regards to capabilities and time-to-market. This is why chip only companies should be concerned. Cloud companies are already there. Microsoft is already there. Automotive companies will now do their own silicon for the software integration. What industry is next?

General purpose SoCs and CPUs beware! Bespoke silicon is coming, absolutely.

Chip only companies... you mean massive standard off the shelf parts. So you think the ASIC market will come back, correct? We are betting on this. Can you make a prediction on what technology and prices will facilitate that, and when will it happen?

For example:
- Competition in the 16-12nm market (double patterned DUV process)
- What is the viability of MRAM now, or in 2025?
- Interposers + HBM, say 1200 routes on a 40um pitch at a palatable cost. 2025? 2026?
- Are there any other viable technologies for 2025 or 2026 that pushes the present practical state of the art
- Reduces mask set costs for EUV in the next several years?
- Reduced turnaround time for MPWs on simpler process nodes

 

[blueone]

But this is avoiding the most important attribute of Apple. It's first and foremost a marketing company. Its products don't have any real edge, but its marketing does. The latter is also more durable with the appropriate investment. The bitten apple logo is the ultimate (and if I may say, beautiful) representation of rebellion for the sake of productive and profitable creativity.

I disagree. Which mobile client SoCs are technically equal to or better than Apple's A16 or M2? If you think so, exactly how? For desktop gaming I'd still rather have an x86 with Windows, but for anything else, no.

I've used Samsung phones and tablets side by side with Apple's for years, because I got the Samsung products from work. Now that I'm retired I'm still buying Apple. Google's Pixel is a nice piece of hardware, but Android continues to annoy me. Also, Apple supports previous generations of hardware in all lines longer than anyone else.

This stuff isn't marketing. It's design and business.

 

[semicomposer]

This stuff isn't marketing. It's design and business.

I didn't say it's only marketing. I said it's mainly ("first and foremost") marketing.

Google's Pixel is a nice piece of hardware, but Android continues to annoy me. Also, Apple supports previous generations of hardware in all lines longer than anyone else.

Thanks for sharing your view, but I don't think this is a mass market consensus view.

I also don't think mass market consumers know whether Apple's chips are better or worse than the competitors. I mean seriously? How many of the mass market consumers even know what a SoC is or what A16 and M2 are (tho the latter two are heavily marketing now). And how many do you think compare the chip specs to competitive products' specs. But one thing mass market Apple customer do believe (and feel) is that Apple products are better and that's why they buy Apple products. Good luck proving it either way. Did you watch and listen to Steve Jobs on why he wanted to emulate Nike's marketing strategy? Do you think Jobs succeeded in that regards?

Also, I will say more important than the specs and design qualities of Apple products compared to its competitors is LESS important than the US government's restrictions of Apple's most capable competitors in the name of national security. You think Samsung is the only company to have built an empire garnering favorable regulatory protection? AND then include the labor arbitrage of cheap Asian workforce and tax arbitrage of the geography of its IP and Apple's LONG TERM profit is no longer driven mostly by innovation but by a business model old as imperialism.

 

[blueone]

I didn't say it's only marketing. I said it's mainly ("first and foremost") marketing.

I still don't agree.

Thanks for sharing your view, but I don't think this is a mass market consensus view.

I do.

I also don't think mass market consumers know whether Apple's chips are better or worse than the competitors. I mean seriously? How many of the mass market consumers even know what a SoC is or what A16 and M2 are (tho the latter two are heavily marketing now). And how many do you think compare the chip specs to competitive products' specs. But one thing mass market Apple customer do believe (and feel) is that Apple products are better and that's why they buy Apple products.

I'm in an extended family full of Apple buyers, in several age groups. Apple M-series laptops are the most coveted because they run cooler and last longer on a charge than Windows (x86) laptops. They like the displays better. They like the watch/airpod/ipad/laptop and ecosystem better because of styling, performance, and integration. I've been surrounded by Windows and Samsung/Apple devices for years and I see what they prefer. If you think it's all a marketing gimmick, whatever, but I disagree.

In case you're wondering, I do have a substantial investment in Apple. And I keep it because everywhere I see young people, especially women, using the entire Apple product line, including the Beats headphones I'm personally not fond of. When I'm at the fitness center I go to I'm always amazed at how nearly every woman I see has an Apple watch on. That means they have an iPhone, and they usually are wearing those (IMO) silly-looking AirPods. In my age group I've run into some people wearing AirPods as hearing aid replacements. I didn't know it was a thing until I had a friend explain it to me. It looks to me like Apple products have a moat and a future.

Good luck proving it either way. Did you watch and listen to Steve Jobs on why he wanted to emulate Nike's marketing strategy? Do you think Jobs succeeded in that regards?

Steve Jobs died in 2011.

Also, I will say more important than the specs and design qualities of Apple products compared to its competitors is LESS important than the US government's restrictions of Apple's most capable competitors in the name of national security. You think Samsung is the only company to have built an empire garnering favorable regulatory protection? AND then take away the geographical arbitrage of cheap Asian labor and tax arbitrage of its IP and Apple's profit is no longer driven mostly by innovation but by a business model old as imperialism.

Utter nonsense.

 

[Mooredaddy]

I still don't agree.

I do.

I'm in an extended family full of Apple buyers, in several age groups. Apple M-series laptops are the most coveted because they run cooler and last longer on a charge than Windows (x86) laptops. They like the displays better. They like the watch/airpod/ipad/laptop and ecosystem better because of styling, performance, and integration. I've been surrounded by Windows and Samsung/Apple devices for years and I see what they prefer. If you think it's all a marketing gimmick, whatever, but I disagree.

In case you're wondering, I do have a substantial investment in Apple. And I keep it because everywhere I see young people, especially women, using the entire Apple product line, including the Beats headphones I'm personally not fond of. When I'm at the fitness center I go to I'm always amazed at how nearly every woman I see has an Apple watch on. That means they have an iPhone, and they usually are wearing those (IMO) silly-looking AirPods. In my age group I've run into some people wearing AirPods as hearing aid replacements. I didn't know it was a thing until I had a friend explain it to me. It looks to me like Apple products have a moat and a future.

Steve Jobs died in 2011.

Utter nonsense.

Agreed. I have no idea what this guy is taking about. Apples brand power is truly unparalleled. Mind share is a real thing and dismissing it is extremely ill advised. People dismiss Apple consumers as idiots and uneducated to their own detriment.

 

[semicomposer]

In case you're wondering, I do have a substantial investment in Apple.

I'm not saying Apple is not a good investment as of today. I'm talking to why it's been such a good investment to day and why it may continue to be for the future. There are a confluence of factors that have all been mentioned. Clearly, we are ranking with importance of each factor and you, shockingly, refute the existence of some of the factors, too. FYI, those factors have made the cover page of some publications in this country.


Now based on what I'm saying what brand names do you think I own for my phone, laptop, tablet, and headphones?

 

[semicomposer]

People dismiss Apple consumers as idiots and uneducated to their own detriment.

I'm not dismissing Apple consumers as idiots or uneducated. There is ZERO evidence of that.

 

[blueone]

Now based on what I'm saying what brand names do you think I own for my phone, laptop, tablet, and headphones?

Radio Shack?

 

[semicomposer]

Radio Shack?

Haha. I’ll pretend this was in jest rather than something else.

I own all Apple FYI. But I’ve avoided being brainwashed.