Apple's push into chips could unnerve suppliers
Apple's push toward its own microchips could dislodge partners
(IBTimes) -- 05/01/2009 --

Apple appears to be pushing toward designing its own microchips for the iPhone, a move that would give it greater control but inevitably affect its base of suppliers.

The iPhone now uses chips from a variety of suppliers including Samsung Electronics Co Ltd , Broadcom Corp, Marvell Technology Inc, CSR Plc and Infineon Technologies AG, analysts say.

If Apple succeeds in coming up with its own chip, it could potentially dislodge at least one of these companies from the iPhone, while sending notice of its intent to take an even bigger role in the creation of its products.

Apple's semiconductor strategy has been apparent for at least a year, analysts say, pointing to its acquisition of microchip company PA Semi and its hiring of experts from chip companies like Advanced Micro Devices Inc.

"It's not chatter," said Broadpoint AmTech analyst Doug Freedman. "The cat's out of the bag."

But even so, it would take about two years for Apple to come up with a chip, said Freedman. "I don't think there's any material impact to the supply chain for another year or two -- maybe longer," he said.

Analysts say Apple is working on developing an application processor for the iPhone, which is currently supplied by Samsung. Application processors control advanced features on phones, such as multimedia capabilities.

"Apple is basically saying we don't want to put our future in somebody else's hands, said Craig Berger, an analyst with FBR Capital Markets. "The key for them is super low-power and better graphics processing."

Samsung and Apple declined to comment.

LOST OPPORTUNITY

Although it would not be a huge monetary loss for Samsung -- analysts estimate its iPhone chip generates revenue in the low hundreds of millions of dollars -- it would remove the South Korean company from a mobile platform that is expected to see huge growth in the coming years.

The impact of an Apple-designed application processor on other suppliers like Marvell, Broadcom and Infineon -- which provide chips that control such things as connectivity and the touch-screen interface -- is less clear.

"It might not affect them directly, but when they're selling these WiFi or Bluetooth chips, they're hoping in the future that they'll get more business than that," said Kaufman Bros. analyst Shaw Wu. "It ends up being a lost opportunity."

Wu believes Apple has been working on an application processor for the iPhone for around a year. He agreed that any new chip is at least a year away and won't make it into the next iPhone, which is expected to be released this summer.

Observers say it makes sense for a company like Apple, which tightly manages its intellectual property, to want more control over the most important pieces in one of its hottest products -- more than 21 million iPhone units have been shipped since its launch in 2007.

"Apple is one of the few guys out there who can pull it off," Wu said.

NEW ARENA

The move would be a chance for Apple to extend its famed engineering prowess into a new arena. The company rose to prominence on the strength of its Mac personal computers. Its fortunes soared with the release of the iPod media player, which it created in the wake of the dotcom crash.

Apple appears to be using the current downturn to scoop up engineering talent and acquire the means to design semiconductors. It has hired Bob Drebin and Raja Koduri, both former chief technology officers of the graphics products group at AMD.

Mark Papermaster, who left International Business Machines Corp last year to join Apple as senior vice president of devices hardware engineering, has a strong background in chips, analysts point out.

But some analysts find it hard to believe Apple would leap into the complex and competitive semiconductor business.

"It's feasible for them to do it but I don't know that it would be practical," said Jim McGregor, chief technology strategist at In-Stat, adding that chip design costs hundreds of millions of dollars.

"Apple isn't the mega company that can do everything very well," he said, but added that Apple is profitable and well-positioned.

The company is also flush with cash to fuel any expensive endeavors, with nearly $29 billion in cash, cash equivalents and marketable securities at the end of March.

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