Four years ago, Apple (AAPL) set out on a dangerous path. It spent about $300 million on a struggling chip designer called PA Semi. The purchase signaled that Apple intended to design its own chips for devices like the iPhone.
That’s a dangerous move because custom chip designs require a ton of money and time and come with a high chance of failure. It usually takes about four years and a huge team of engineers to move from an initial design to an end product. Any hiccups along the way translate into smartphones and tablets that either underperform or are late to market. In short, a chip gone wrong can turn a winner into a loser real quick.
But the early indications based on reviews of the iPhone 5 are that Apple’s four-year bet has paid off.
The iPhones and iPads sold to date run on Apple’s A4 and A5 chips. Apple does not reveal much of anything about the innards of these chips, but analysts armed with X-ray equipment have pointed out that the designs appear to borrow a lot of technology from Samsung, which designs its own mobile chips and manufactures them for Apple. Yes, Apple’s engineers made some nice tweaks to wring more battery life and higher performance out of the silicon, but we had yet to see what a true, ground-up Apple microprocessor design would look like.
Enter the iPhone 5 and its A6 chip, which bears all the hallmarks of a Conceived In Cupertino product. According to Linley Gwennap, a semiconductor analyst and founder of the Linley Group, Apple completed the heart of the A6 design in early 2010. A short while later, it paid $120 million to acquire Intrinsity, a specialist chip design house that had turbocharged some of Samsung’s products. By the summer of 2011, Apple was getting its hands on early versions of the A6 chip and heading toward full-scale production at Samsung’s plants.
In a research note, Gwennap points out that the A6 design is so unique that software makers need to redo their apps to take advantage of the chip’s features. This is a pain but does come with benefits. Apple’s devices will likely boast longer battery life and snappier performance than rival products.
Google (GOOG), a major smartphone competitor, has as of yet proven unwilling to design its own chips. Like Nokia (NOK) and HTC, Google relies on chips from companies like Qualcomm (QCOM) and Nvidia (NVDA). This is a totally sane stance when you consider how risky and expensive it is to concoct your own microprocessors.
Gwennap, for example, points out that Apple spent about $400 million to get PA Semi and Intrinsity and tens of millions more for a license from the U.K.’s ARM (ARMH), which provides the base intellectual property behind just about every mobile chip. Apple then likely forked out more than $100 million over the past four years on chip engineers and research.
As a result, however, Apple will ship products with a super-advanced chip “about three months before arch-enemy Samsung does,” Gwennap writes. “These three months happen to come during the big holiday buying season, during which the iPhone 5 could generate $25 billion in revenue. So that half billion dollars could be money well spent.”