Did Apple Just Set a New Trend?

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Apple is currently the largest company in the world as measured by market capitalization. This is neither an accident nor is it unjustified: Apple's profitability more than justifies it. Apple's success is largely due to the company's iPhone product line. While the Android versus iOS debate rages on in Internet forums ad infinitum, the bottom line is that no smartphone vendor has the customer loyalty or the ability to charge a premium in a way like Apple does. One thing that has people excited is that Apple designs its own A-series chips for its phones. The question, though, is whether this is a long-term trend?

Designing your own chips: neither necessary nor for everybody
The truth of the matter is that for smartphones, Qualcomm is already a one-stop shop when it comes to applications processors and cellular modems. For the vast majority of smartphones - including the very highest-end devices from Google/Motorola, Samsung, and HTC - Qualcomm's chips (and, once it rolls out its next-generation, high-end parts, Intel's ) are fantastic. In fact, it's very tough in the long-term to beat what a specialized chip company can do (especially ones with multibillion, chip-focused R&D budgets).

However, in the case of Apple - which is, to be honest, a bit of a control freak - designing its own chips makes sense. See, Apple tightly controls its own OS, it controls the application ecosystem, and very often what matters to Apple (high single threaded performance, major focus on graphics) isn't what necessarily matters to the rest of the smartphone ecosystem. So, for example, Apple doesn't need to market "quad cores" so what it did was design two absolutely monstrous cores for its A7 - and from a pure technical perspective this is the right way to go (since Apple doesn't need to play marketing games).

Why this isn't a long term trend, however
While Apple is likely to continue to build its own chips for as long as management feels that it can do with its chips stuff that the merchant vendors can't (or won't), the truth is that the merchant chip space (i.e. smartphone vendors buying parts from dedicated semiconductor houses) is probably going to be the long-term trend. Developing chips is expensive (and getting more expensive each year) and, frankly, there's no guarantee that an in-house solution will be any better than one bought from a dedicated chipmaker.

Further, while Apple has the scale and the profit margins to develop an in-house solution, it's tough to see most of the Android landscape having that (in fact, it's really only Samsung and Apple that control the vast majority of the profitability in the handset space these days). Further, Samsung - with all of its resources (including its own chip manufacturing facilities) - hasn't yet been able to do an internal solution that matches up to what Qualcomm is able to supply. If Samsung hasn't been able to really nail it over all of this time, why would anybody else want to waste money trying?

Foolish bottom line
Apple is a trend-setter, but in this case, Qualcomm, Intel, and perhaps a few others will - on a very long term basis - have the scale and R&D chops to compete profitably in the mobile chip market. However, at the end of the day, building custom chips for smartphones really isn't worth it for the vast majority of smartphone players. And, who knows, in time the merchant chip landscape could produce such compelling products that even Apple won't want to bother with an in-house solution -- although given the strength of Apple's team, this isn't likely for a long time.

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The article Did Apple Just Set a New Trend? originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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