What servers and switches have become for major cloud service providers such as Google (GOOGL) - Get Report, Facebook (FB) - Get Report and Amazon (AMZN) - Get Report, chips increasingly are for Apple (AAPL) - Get Report. Looking to optimize the performance of its hardware as well as keep costs down, Apple's own chip R&D efforts now cover not only its A-series app processors, but also several other iPhone/iPad chips and a handful of parts going into non-iOS devices.
These efforts have collectively stepped on the toes of a number of chip and intellectual property suppliers. And it's not hard to see additional suppliers getting hit in the coming years.
British chipmaker Dialog Semiconductor (DLGNF) , a long-time supplier of power management ICs (PMICs) used in iOS devices, is the latest to feel the heat. On Tuesday, its shares fell 14.4% in Frankfurt after Germany's Bankhaus Lampe issued a report stating there's "strong evidence" that Apple is developing its own PMICs and "intends to replace the chip made by Dialog at least in part." It added Apple is believed to have 80 engineers working on a PMIC, and plans to use it within iPhones "as early as 2019."
Dialog gets close to three-quarters of its sales from Apple, which has long been obsessed with finding ways to lower the power consumption of its hardware. In a statement, Dialog insisted "the level of visibility into the design cycle of its leading customers remains unchanged and the business relationships are in line with the normal course of business." Of course, that doesn't preclude Apple from working on chips meant for hardware that are not part of its current design cycle.
Dialog's plunge comes nine days after Imagination Technologies (IGNMF) , a developer of GPU core designs used by third-party chipmakers, fell over 60% on news that Apple has told Imagination it will stop using its GPU designs within its A-series processors in the next two years. With Imagination facing tough direct competition in the Android market from ARM's Mali GPU cores, as well as indirect competition from the proprietary Adreno GPU cores that Qualcomm (QCOM) - Get Report uses in its Snapdragon processors, Apple had come to account for about half of Imagination's revenue.
Already, Apple has quietly become a massive fabless chip developer. Its existing chip work includes:
- The A-series processor line. The chips pair Apple-developed ARM CPU cores with GPU cores supplied for now by Imagination. They tend to fare well in benchmarks against comparable processors found in high-end Android phones, thanks partly to Apple's ability to optimize the chips for iOS (and vice versa).
- Flash memory controller chips. Apple began designing its own after buying flash controller vendor Anobit in 2012.
- Touch ID fingerprint sensors. Developed with the help of Apple's 2012 purchase of fingerprint sensor maker AuthenTec.
- M-series motion co-processors. Uses to collect and analyze sensor data. Now baked into A-series processors.
- The S1 and S2 system-in-package (SiP) solutions developed for the Apple Watch. They house an Apple processor, along with third-party memory, storage, connectivity and sensor chips, in a common chip package.
- The T1, an ARM-architecture chip used to power the OLED Touch Bar on recently-launched MacBook Pro models. Apple is reportedly working on a successor chip that would handle some of the low-power mode functions supported by MacBooks.
- The W1, a Bluetooth chip built into Apple's AirPods and new Beats headphones. They enable some of the AirPods' unique features, such as the automatic pausing of music when an AirPod is removed from one's ear.
- A timing controller chip used by Apple's 5K-resolution iMac display.
What additional chips might Apple bake into future hardware? Since 2015, there have been reports that Apple is working on chips that combine a display driver with a touchscreen controller and Touch ID sensor. Such a product could reduce touchscreen thickness while also allowing Touch ID to be built into a phone's display. iPhone LCD drive Synaptics, which has been developing its own TDDI products for many years, could be affected, as could touch controller suppliers Broadcom (AVGO) - Get Reportand Texas Instruments (TXN) - Get Report.
Editors' pick: Originally published April 12.
TI could also be hurt if Apple chose to replace the company's display PMIC and battery charger chips in future iOS devices. Given Apple's reported attempts to replace Dialog's PMICs with its own, such a move is hardly inconceivable.
Judging by the 2% decline on Thursday in Cirrus Logic (CRUS) - Get Reportshares, the Dialog news has sparked some modest fears that Apple could try to replace Cirrus' audio codec chips down the line with its own. The big investments Cirrus has made in developing smart codec chips that improve audio quality, lower power draw and enable always-on voice activation could make Apple think twice about ditching the company. But with Cirrus having received 85% of its December quarter revenue from Apple, any move by Apple to develop its own codec chips would be disastrous.
Motion sensor chips that typically pair an accelerometer with a gyroscope are another possibility. Over the years, Apple has sourced these chips from InvenSense, which about to be acquired by Japan's TDK); STMicroelectronics (STM) - Get Report; and Bosch.
Given the W1 chip launch and its 2013 purchase of Bluetooth chipmaker Passif Semiconductor, one could also see Apple trying to develop Wi-Fi/Bluetooth combo chips that replace the ones it gets from Broadcom. But replicating the investments Broadcom has made in creating high-performance chips that support newer Wi-Fi and Bluetooth technologies would require a fair amount of time and money.
It's unlikely that Apple would try to fully develop its own 4G modems, given this business is very R&D-intensive and has driven out many chipmakers over the years. However, in 2015, VentureBeat reported Apple is interested in creating a system-on-chip (SoC) that pairs an A-series processor with Intel (INTC) - Get Report modem IP, and which would be manufactured by Intel. Apple currently relies on standalone modems from Intel and Qualcomm; Apple and Qualcomm's bitter legal dispute has fueled speculation that the companies' modem relationship could end.
RF components such as power amplifiers, filters and duplexers, supplied by the likes of Broadcom, Skyworks (SWKS) - Get Report and Qorvo (QRVO) - Get Report, are one field where Apple seems pretty unlikely to tread. In addition to having considerable engineering resources, RF chip suppliers generally rely on their own specialized fabs to make their products. That's bound to give Apple pause.
One thing is for certain: With about 250 million iOS devices sold annually, Apple has a strong financial incentive to swap out more third-party iPhone/iPad chips with its own, provided the R&D costs aren't excessive and it can deliver comparable or superior performance.
And with the company producing over $50 billion in annual free cash flow, it definitely has the resources to invest more in this area without feeling much of a strain.