Apple Makes Its Way to an In-House Design Team 8 comments
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Apple (AAPL) is grabbing some more headlines, having recently hired a few more senior semiconductor executives. It builds on what they have been doing since they acquired PA Semi a while back, and it appears they will go all the way to having their own in-house design and development team.
Apple is owning up to the fact that silicon has evolved into another form of software. Going back to our notes from the 2004 STMicro (STM) analyst meeting, they were seeing that basic systems on a chip (SoC) were going into millions of lines of code (MLOC)) just for a TV set. We’re no semiconductor analyst but we noted that the SoC segment of semiconductors was becoming a software business.
While a huge segment of the semiconductor business is in functional and commodity products, a major growth (and higher margin) segment has been SoC. These are purpose-specific and basically just advanced software that happens to be compiled all the way down to silicon.
What Apple is doing is realistic and of course a bit smarter than what the average company is doing out there. Apple is far too large not to rely on major partners in the semiconductor industry to develop technology for them, but they will be able to be smarter users and do some very special, focused things with their own team to make it harder to replicate their success and keep their secret sauce actually secret. They can push the envelope more with partners and also retain some proprietary control over some of the software-like elements.
This starts to bring up a broader discussion of chip-level, os-level and application-level platforms as we evolve into a more consumer-focused, cloud-based world, but that’s worthy of a separate post, maybe even a research note.
Disclosure: Research 2.0 owns shares of Apple at the time of this writing. See our website for further disclosures.
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> economy of scale that Apple will not be able to beat and would be
> etter off economically to buy from an outside source.
That may be true for the present but I'm not convinced it's a good plan going forward. It will require a major investment for which they aren't likely to see a return very soon, but Apple's been building a cash hoard for many years.
To build an in-house source for ASICs would be consistent with their history of desiring control over all aspects of their product development. Total control over product development is in Apple's DNA, so is their desire for total control of a product's market. This control serves to guarantee dominance over their competitors. They don't want to be held hostage to uncertainties related to outside sources - remember their huge investments in NAND memory starting a couple years ago? The next logical step is to pursue independence from vendors of ASICs, for which it has built a healthy cash reserve. Many uses for it have been proposed, such as dividend distribution or acquisition of another business as it did with PA Semi, but what would be the most appropriate use for those funds to secure the company's future, and consistent with its history? The question kind of answers itself when if think about it.
Apple is primarily a hardware manufacturer and its profits come primarily from computer products. Remember that Apple made its own chips in the past, only to abandon that effort as others did it more cost effectively while Apple struggled to survive. That's no longer the case.
There are serious potential advantages in performance, power and cost and with the large phone volumes the financial ROI is significant. A few dollars on 10 million units more than pays for a large semi investment.
The history of vertically integrated IC groups in system companies varies with strong success at Cisco, IBM, Juniper vs. failure at SUN.
This is indeed a strong resource ramp, yet it seems to be a bit of a random talent buying binge without much planning or forethought about integration. There are now lots of stallions with great potential for chemistry issues between the leaders (Dobberpuhl, Papermaster, Drebin) all in addition to the existing ASIC-SOC leadership. Time will tell whether the custom guys (PA Semi) or SOC guys will successfully meld the custom/asic dichotomy, get to a single methodology on a unified tool platform.
If they can afford it the best structure would be two parallel competing efforts with one leg external and the other internal and give the system guys the ability to freely choose the winner.
It's also interesting to note that this is a reversal of the trend towards disaggregation driven by the private equity buyouts (Phillips/NXP, Moto/Freescale, Agilent/Avago) which all seem to be struggling ventures. The theory on these market moves was that the semi's guys could access larger markets and the system groups could be free to solicit best solution from an open 'commodity' market. Yet the outcome was that the system guys found it harder to deliver product differentiation and the semi guys found their cost structures to big for the commodity pricing.
Long APPL