The Strategist

Why would Apple replace Intel’s chips with its own?

04/03/2018 - 10:13

Quotes of Intel fell 9% after Bloomberg reported that Apple would refuse the partnership with the supplier of chips for Mac computers. Apple will begin to switch to the chips of its own production since 2020, starting with the PC sector, and then integrating them into their smartphones.

JiahuiH via flickr
JiahuiH via flickr
At the moment, Apple uses its own chips in the iPhone, iPad, Apple TV and Apple Watch. A new initiative called Kalamata is aimed at facilitating interaction of all Apple devices with each other. The sale of Apple processors provides Intel with about 5% of all revenue for the year, and the decision to abandon chips may hurt the latter, Bloomberg notes. Intel itself told the agency that they do not comment on the rumors about the customers, and Apple refused to talk at all. 

Apple's development processors are likely to be based on the ARM architecture, the same one used in the iPhone and iPad processors. It is assumed that they will allow the company to make its ecosystem even more complete, and developers will be able to port applications from one platform to another, making minimum efforts.

Intel has never disclosed the share of revenue attributable to Apple. However, Cowen and Company analysts estimated the revenue from the chips for LTE modems iPhone at $ 1.5 billion with total annual revenue of $ 60 billion in 2016.

As Bloomberg notes, Apple's move will be a blow to the American chip maker. According to the agency, Apple brings Intel about 5% of annual revenue. Apple has been using Intel chips in its computers since 2005.

Traditions of specialization

Modern production forces all companies to focus on their specialization: Intel and Qualcomm produce processors and other chips, Lenovo and Sony use these processors to make laptops and smartphones, respectively. Rigid competition leads to a minimization of profit. As a result, each company is engaged in what it can do the best.

It is somehow easy with processors since that all smartphones now use ARM-architecture, invented by the company with the same name. It allows achieving sufficient performance with minimal power consumption. As a result, Qualcomm, Mediatek and Apple are building new devices based on it. In addition, the process of making chips is now divided into design and actual production.

On the other hand, Apple's laptops and desktops still use processors and video cards from Intel and AMD manufacturers. The level of technology, as well as the existing patents, does not yet allow the company to develop its own competitive solution. Moreover, Apple uses Qualcomm and Intel modems even in smartphones and tablets. Even the most expensive company in the world has not yet been able to violate the principle that "fast-profitable-own" can be realized in only a few selected areas.

So, after all, why should Apple develop its own processors, if it is possible to buy competitive analogs in the market?

It will be easier for the company to control the timeframes for the release of products and to comply with secrecy. Notice how often the media guess what the company will release even before official statements. Components for test samples are made abroad and apparently the partners cannot keep secrecy. On the other hand, it will be much easier to keep the intrigue at its own pilot plant.

Despite all this, launching a new type of product is always a challenge for a company of any level. There is no guarantee that Apple will soon be able to launch production of its own processes in the series. But the market has already believed in this prospect, and Intel's shares on April 2 ended the auction in New York falling by more than 6%.