Apple building a secret chip empire -- and a competitive advantage

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If there's one trend that's defined the computer industry for the past two decades -- indeed, that's defined pretty much all industries, everywhere -- it's specialization, and the outsourcing of commodity manufacturing to subcontractors. As a result, modern American electronics makers are essentially design shops, building prototypes out of what are essentially pre-made parts to send to factories in Asia that actually make the stuff. I'd argue one of the things that has made Apple successful in this environment is its recognition of this fact and its resulting focus on design. Since design is the major differentiator between products built from the same parts, well-designed products have an edge. This is especially true since Apple started using the same x86 chips as everyone else. (Of course, there's also OS X in the equation, but the economics of software are very different.)

But that's the computer side. What about mobile devices? Well, the same economic trends hold there, too, with just about everybody ARM-licensed chips -- and that goes for the iPod and iPhone too. That's why it's intriguing that, for the past year or so, Apple has been assembling a chip-making brain trust, apparently to develop new custom chips for future Apple devices. The process began with the company's acquisition of P.A. Semi, and there's been a hiring spree of chip engineers ever since.

Now, Apple won't be designing new chips from scratch, or adding a chip fab to One Infinite Loop; the Wall Street Journal says that they'll be working on ARM-based chips with an aim at improving performance and battery life. Obviously better performance and battery life will be good things for Apple, but why sink their own money into improving them, when surely ARM and other chip manufacturers are already doing that R&D? Better performance and less power consumption would be great in a laptop chip too, but it doesn't appear that Apple is setting up an x86 chip design group.

The reason behind this probably lies in another little factoid buried in that WSJ piece: "People familiar with the situation say Mr. Jobs told P.A. Semi engineers last April that he wanted to develop chips internally and didn't want knowledge about the technology to leave Apple." Apple gets Intel innovations the same time everyone else in the industry does, but that's OK because its edge in computers comes from the operating system and the product design. I'd argue that these are the sources of their advantage in mobile devices, too -- but apparently Jobs thinks that this is a nearer thing, and wants faster gadgets with longer battery life than the competition as well. Can't blame him, I suppose. It will be interesting to see if they can pull it off.

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