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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 we will 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?

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.
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While noone without inside knowledge may know exactly what has been planned, I think that Apple would be taking a very high risk of its strategy is to take over Imagination at a smaller stake. If Imagination is for sale, and Apple suddenly becomes a bidder, I think that it will attract a whole lot of potential buyers, both from the engineering/manufacturing side (i.e. companies willing to buy Imagination in order to use its designs) and from the fund side (I guess that the potential open legal issues between Imagination and Apple would make patent trolls drool over the concept). So I am not sure what exactly is the plan here.

On the other hand, if Apple buys Imagination moving to MIPS is going to be big. Not really sure that this is what Apple wants, but given the vast resources and the secrecy behind the company walls, noone really knows. I would consider though the possibility of a MIPS-based SoC not high at least in the foreseeable future.
Apple has calculated that it has the power and resources to erase 30 years of custom and usage in the mobile wireless device business, not for the "good" of consumers, but rather to further line its bloated profits. Already extracting 92% of all profits from the industry, despite being a latecomer to the market, Apple has decided it can pump its margins by another point or two. That might work against small display and graphics vendors, but it will not work against Qualcomm, with its 130,000 patents, billions of its own, and corporate DNA built upon pioneering inventions, provided at a modest price to all. It is because of that R&D engine in Wireless Valley, that global entrants can compete with the King Of Profits. Apple would be happy to slow progress in order to extend the relevance of its own overpriced products. In this case, neither the law, nor the facts, support Apple's avaricious and self-centerd strategy. All of Apple's strictly enforced NDAs and vendor reticence will now be subjected to the Federal Discovery Rules, and will be exposed to the light of day. Their latest gambit, linked by Daniel, will feed a huge punitive and compensatory damage risk for Apple, confirming the "intentional interference with established contractual relations" counterclaim, and playing into Qualcomm's case before a hometown jury.
What will Apple look like with a diminished iPhone segment? Will the iSheep be ultimately pleased with the bully behind the Wizard of Oz?
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It makes zero sense for Apple to buy Imagination for MIPS if you think about the cost of porting iOS and the entire app store ecosystem over to the MIPS ISA.
It makes zero sense for Apple to buy Imagination for MIPS if you think about the cost of porting iOS and the entire app store ecosystem over to the MIPS ISA.
Thanks for sharing your view, to which I concur on the cost part. I am that not confident only cost will deter Apple from taking a step that will lead to long term gain and more vertically integrated. Maybe lack of existing ecosystem may discourage Apple to make this switch. But how about gradual changes? First use some cross-arch virtualization solution that runs ARM apps on MIPS, and then later go with complete MIPS based SoC. My technical knowledge is limited, so I cannot judge the ramifications of using virtualization sw, maybe some performance has to be compromised. Let me know your thoughts on this.
ARM's licensing terms are very flexible and not financially onerous. Apple has an architectural license, which means they can design their own core around the ARM ISA and pay reduced royalties on a chip basis.

Furthermore, the ARM architecture is more than just an instruction set. SoC architecture and process architecture are fairly integrated, and there is a huge ecosystem around ARM in terms of IP blocks, interconnects, fabric, and implementing all of that on the latest process. I just don't see how it would be possible.
Daniel, the contract manufacturers who have longstanding PLA's with Qualcomm, have been reporting the amount actually owed under those contracts, but are now withholding those amounts at the request of Apple. Since Apple is not a party to those contracts, such interference with those existing agreements is tortious, and subject to punitive damages against Apple, and a certain arbitration award against the CMs.

Perhaps Tim should see how many iPhones he can sell without a robust and fast data connection. If he wants to sell them with EDGE/GPRS/GSM only, he can avoid paying a couple percent of the wholesale ASP in royalties.
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