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Until very recently, it was believed that the CPU core found in Apple's (NASDAQ:AAPL) latest iPhone 5 was either a faster Cortex A9 or the brand new Cortex A15 from ARM Holdings (NASDAQ:ARMH). However, according to Anandtech, Apple's A6 system-on-chip is actually based on a custom Apple CPU core that implements the ARMv7 instruction set. This is a big deal for a number of reasons reaching far beyond smartphones:

Intel Pushed Out Of The MacBooks?

While I noted in a previous article that Apple using an Intel (NASDAQ:INTC) CPU inside of its iOS products (iPod, iPhone, iPad) was unlikely, the move to a custom CPU (rather than simply an in-house integration of an ARM core with peripherals) in its iOS products signifies that Apple's keenly interested in continuing its vertical integration push to increase margins. The question, then, is will Apple push Intel out of its MacOS lineup by eventually designing its own notebook/desktop worthy CPUs based on the ARM instruction set?

I think this would be unlikely. First and foremost, the MacOS lineup is very high margin but relatively low volume. Apple's distinctiveness in the space and its focus on the high end (that most PC vendors can't really get right) allows it to maintain a competitive advantage even with off-the-shelf components.

Further, while designing a mobile CPU core is one thing (a lot of companies have done it: Qualcomm (NASDAQ:QCOM), Marvell (NASDAQ:MRVL), and MIPS (NASDAQ:MIPS)), designing a high performance, energy efficient CPU core is a totally different thing. In terms of performance per watt as well as process technology, Intel simply cannot be beaten, and I don't expect this to change in the foreseeable future.

Further, porting all of the MacOS applications from x86 to ARM is doable, but would prove more difficult than moving from PowerPC to X86 was. Apple's PC market share is much greater than it was when Apple used PowerPC. Also, Apple's software ecosystem on MacOS is much larger than it was in the PowerPC days, when Apple was simply a bit player in the scheme of the PC world, so porting it all over would be a headache that Apple and Mac users don't really need.

Competitive Advantage

The biggest reason and advantage that I see here is that Apple wants to be more in control of its own destiny. It does not want to have to wait for ARM to finally release a new design while other phone vendors have their choices of new and sophisticated chips from the likes of Qualcomm. This allows Apple to customize its cores to suit the performance and power consumption characteristics needed by the device.

While the CPU is a relatively small part of the overall phone and system on chip design, it is an important step to see Apple use its cash and resources to develop its own technology to separate itself from the hordes of phone vendors that use off-the-shelf parts. These kinds of vertical integration moves help the gross margin profile, important as Apple will need to compete with phone vendors willing to cut their own margins to next to nothing in order to gain share.

Conclusion

Kudos to Apple for further vertically integrating its iPhone lineup. With a custom operating system, CPU core design, and system-on-chip design, the only things that Apple doesn't control is the baseband chip (Qualcomm supplies this), the graphics (Imagination Technologies supplies this, although Apple holds roughly 10% of that firm's shares), and the fabrication plants (Samsung currently provides this service).

While I have expressed concerns that Apple's gargantuan margins on its iPhone won't last forever (and I still contend that they won't), Apple will still be a step or two ahead of the majority of the commodity players in the space on the gross margin front.

Disclosure: I am long INTC, MRVL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Apple's A6 Is A Custom Design: What Does This Mean For Investors?