What if Apple (NASDAQ: AAPL) became the second largest chip brand in the world, and nobody noticed?
Last week, I speculated about the upcoming iPad 2 announcement, wondering which established tech companies would be left out of Apple's vision of computing 2.0. At the unveiling last Wednesday, Apple executives gave that vision a rather pompous name, "post PC." And they also made it clear just which tech mainstay wasn't invited to their mobile electronics revolution: Intel (NASDAQ: INTC).
First, a little background:
The inaugural generation iPad included a processor called the A4, which was designed by Apple and manufactured by Samsung (SSNLF.PK). For a first generation product aimed at creating a market and capturing first mover advantage, the choice to use an in-house processor could have been one of convenience, speed, or even necessity. After all, Apple was creating an entirely new product so it made sense that it couldn't license the engine from someone else.
Then the A4 chip made its way into the iPhone 4 and then the iPod touch. And now with the iPad 2 announcement, we learned that Apple has created a next generation of the chip, the A5, making it clear that the company is making itself quite comfortable in the chip business.
Now the numbers:
Working off of Apple's FY 2010 shipments, we can get an idea for just how big this business for Apple branded chips could already be:
| Product | Units |
|---|---|
| iPhone | 40 million |
| iPod Touch | 50 million |
| iPad | 7 million |
Admittedly, not all of these sales included A4 processors because Apple didn't roll out the iPhone 4 until a few months into the fiscal year. But as an estimate, an installed base of at least 100 million Apple branded chips doesn't seem far off. FY 2011 unit numbers are anyone's guess, but an estimate of about 150 million devices seems reasonable, given the recent growth rates of the iPhone and iPad.
So by the end of 2011, we could have 250 million devices with Apple logos, rather than Intel trademarks, emblazoned on their processors.
The competitor:
Although Intel doesn't release unit shipments for its Atom processor, it does provide data on total quarterly and yearly revenue growth for those sales: up about 8% for the 2010 fiscal year but flat for Q4 2010. Not exactly what I would call runaway growth.
The future:
Tablet sales, meanwhile, are growing rapidly, in many cases directly cannibalizing PC and netbooks sales. In fact, the tablet sector isn't just cannibalizing the PC industry, many believe that it is becoming the PC industry.
Jen-Hsun Huang, Nvidia's (NASDAQ: NVDA) CEO, discusses tablets in the company's most recent conference call:
It will become the PC. This is the new personal computer, and there are just different form factors. There’re smaller versions of tablets, we call them smartphones or superphones. There are larger versions of tablets, we call them notebooks...And so I think that you're going to find the industrial design of personal computers has become disrupted, if you will, as a result of mobile computing components being used and mobile computing processors being used.
With industry leaders calling notebooks, smartphones, and PCs simply "versions" of tablets, it is easy to see why tablets are quickly becoming the central front in personal computing.
The disruptor:
We know that Apple owns the tablet industry, at least for now, and the company may sell as many as 30 million iPads in 2011. And with hundreds of millions of its devices flooding the mobile computing market, Apple could soon rank among the top processor brands in the world.
So the disruption has already begun and it is becoming increasingly clear that Apple is entering yet another industry it has no business in (cell phones, really?) full of established, entrenched players (music business, seriously?), that it may ultimately dominate.
Disclosure: I am long AAPL.
