How Apple's Chip Strategy Is Evolving


Some things get better as they age, and Apple's (NAS: AAPL) mobile processor strategy is no different. The Mac maker designs its custom ARM Holdings (NAS: ARMH) -based A-family of chips in-house, and with the unveiling of the new iPad earlier this week, the company showed that its chip strategy is beginning to evolve.

Setting the stage
Apple acquired small chip shops P.A. Semi in 2008 and Intrinsity in 2010, laying the foundations for it to begin custom-designing its ARM-based chips on its own in the name of good old integration instead of relying on third-party chipmakers.

It still taps contract manufacturers to do the fabricating, as most chip players nowadays are apt to do, and arch-frenemy Samsung currently pumps out A5 chips in its facilities in Austin, Texas.

A brief history of A-chips
The first member of its A-family of chips was the A4 that made its debut in the original iPad in 2010. In characteristic Apple marketing, there was a lot of hoopla over this chip's capabilities and the low-power advantages it boasts by being custom-designed. Apple is one of the few ARM players that really add a layer of differentiation beyond standard ARM cores, so in fairness, credit is due here.

This same A4 chip subsequently found its way into the iPhone 4, fourth-generation iPod Touch, and the second-generation Apple TV set-top box, or STB, that were all released later that year. That means this single-core A4 chip powered four different product lines that were updated or introduced in 2010.

Next was the A5 chip, which was bumped up to dual cores and was similarly introduced in the iPad 2 in early 2011 and then found its way into the iPhone 4S, which was released in October. The iPod Touch released in 2011 really saw no notable upgrades or changes to its processor or otherwise, assuming you don't consider the addition of a white model a meaningful upgrade.

That makes two major products -- the iPad 2 and iPhone 4S -- released in 2011 that run the same dual-core A5.

Chip switches
Fast-forward to this week's event, where Apple took the wraps off the latest and greatest iPad and a new Apple TV STB. While many watchers, including me, were expecting a full-blown quad-core A6, rumors leading up to the launch that Apple was going to use a ramped up A5X chip turned out 100% accurate.

Cupertino opted to use a modified version of the previous chip, with the A5X sporting a dual-core CPU but moving the GPU up to quad cores to handle all 3.1 million of those pixels. Quietly behind the headlines, Apple decided to use a single-core A5 chip in the new Apple TV STB -- an entirely different flavor that's never been used before.

On top of that, many analysts (again including me) expect that Apple will choose to bust out the mythical quad-core A6 in this year's sixth-generation iPhone. Chip analysts Linley Gwennap of The Linley Group and Dean McCarron of Mercury Research both told MacWorld that the A5X is likely to be an iPad-only affair.

If true, this would mean that by year's end Apple would be using three distinct chips for three distinct products, a departure from the single-chip strategy before it.



The reason this strategy makes a lot of sense is that each product family has very different needs that different processors are better suited for.

Just what the iDoctor ordered
The next iPhone probably doesn't need such graphics horsepower, since it already features a Retina Display and doesn't have nearly as many pixels as the new iPad. The A5 (and probably also A5X) is manufactured on a 45-nanometer process, and Cupertino is probably looking to move the A6 down to 28 nanometers to reap additional power efficiencies.

Apple has long been rumored to soon tap Taiwan Semiconductor Manufacturing (NYS: TSM) as a contract manufacturer. This move hasn't come to fruition yet, but it could potentially someday soon, as TSMC ramps up 28-nanometer production. Apple has allegedly tested A6 production at TSMC, but only time will tell whether this rumor has legs.

Power efficiency is much more important for a smartphone than for a tablet because the device is smaller and can't pack in as large of a battery. The Apple TV is stationary and plugged in, so power efficiency is even less of a concern there, and its fewer uses also means it doesn't need as much processing power as the digital Swiss-army knives that mobile iDevices have become.

Apple is clearly branching out its chip strategy and tailoring chips for its specific products' needs.

The best $400 million I ever spent
With Intel's (NAS: INTC) Medfield Atom foray, some have speculated that Cupertino would someday switch to x86 chips for its iDevices, but I find this highly unlikely. A major fundamental architectural change is a tall order to fill, although it's been done in the past. Apple switched Macs to Intel chips in 2006, after all.

iDevices are a different story, though, since they've always been all ARM, all the time. Making the switch would be a nightmare with software compatibility, and Apple's custom ARM-chip strategy is obviously taking off in sophistication.

Looks like that $400 million for those two chip shops was money well spent.

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At the time thisarticle was published Fool contributorEvan Niucurrently pumps out Foolish Apple articles from his facilities in Austin, Texas. He owns shares of Apple and ARM Holdings, but he holds no other position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Intel and Apple.Motley Fool newsletter serviceshave recommended buying shares of Intel and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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