Apple joins IC market with $278M PA Semi buy, deal suggests no Atom in iPhone

Industry speculation had suggested that Apple would favor Intel's new Atom chip for next-generation iPhones and iPods. However, on today's news, the likelihood of an Atom-iPhone agreement seems slim.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 4/23/2008

Apple Inc has bought PA Semi, a fabless chip designer that specializes in low-power PowerPC microprocessors, for $278 million, according to reports.

The move has raised questions as to Apple's future work with Intel Corp, the consumer-electronics giant's Macintosh processor provider. 

Apple announced it would switch to Intel processors from IBM's PowerPC line in 2005 when it ended its long-time dealings with Big Blue. The company's transition to Intel processors was finalized in August 2006 when Apple debuted a Xeon-based 64-bit Mac Pro desktop workstation at its Worldwide Design Conference (WWDC) in San Francisco. At Apple's June 2007 WWDC, Intel CEO Paul Otellini called the Apple-Intel agreement "one of the best things" in his career and "one of the best things for Intel" during the event's keynote. Both he and Apple CEO Steve Jobs alluded to new jointly developed products on the horizon during the same address. 

Industry speculation had suggested that Apple would favor Intel's new Atom chip for next-generation iPhones and iPods, based on Atom's low-power consumption and small size, as well as the companies' existing partnership. However, on today's news, the likelihood of an Atom-iPhone agreement seems slim.

"[Such an acquisition is] not too unexpected," Richard Doherty, president at researcher Envisioneering Group, told Electronic News this morning. "Apple is in a position to sell tens of millions of iPhones and wireless iPod devices. Because OS X is Unix and very portable, this [deal] gives Apple a very tight coupling of silicon hardware and software that no other vendor has. And with the kinds of volumes Apple has, it is of course a blow to ARM and others, including Intel, that this technology will be in their DNA."

However, the analyst does not believe Intel is down for the count when it comes to expanding its Apple agreement beyond computers. "I don't think Intel was counting on the iPhone with their mobile Internet device [MID] strategy," Doherty said. "If Apple goes toward devices sized between their current MacBook Air and iPhone form factor, Intel might still have a shot at that. For devices that might be, say, paperback-book sized, small hand tablets through legal-pad sized, those devices might still be open to Intel's Atom processor and their MID strategy. 

"Apple's been very happy with Intel as a custom tailor. Intel has done enormous heavy lifting. I've heard nothing but great things from Apple's team and from the Intel folks," he added. 

Electronic News could not reach Intel for comment.

PA Semi buy planned for years?

Doherty suggested that an IC-design-company acquisition could have been in the works at Apple for some time. Indeed, rumors surfaced that Apple was exploring the possible acquisition of PA Semi in 2006, just before Apple announced its processor agreement with Intel. 

"I think I saw this coming back when they ended their deal with PortalPlayer," Doherty said, pointing to Apple's Q2 2006 termination of an iPod SOC agreement with PortalPlayer that eventually sent the company's profits spiraling down before it was acquired by Nvidia in Q4 of the same year. 

"About 24 months ago it was fairly clear that Apple was not going to have others riding their coattails. Steve Jobs has always been … the toughest negotiator on Earth," Doherty said, noting the "razor-thin" margins that some of the early iPod vendors saw and noting Apple's recent termination of its agreement with Wolfson.  "When Apple hits huge successes, you are not along for the ride—even if your name is IBM, for example."

With the PA Semi buy, Apple brings in IC designs familiar to its devices. PA Semi's founder Dan Dobberpuhl has a history of designing StrongARM chips, similiar to ARM-architecture-based processors currently in use in Apple iPhone and iPod Touch, from his previous work at DEC. Intel picked up the StrongARM technology when it took over DEC's microelectronics business, which had taken an architecture license from ARM Ltd. Intel began dropping the StrongARM name in 2003, merging the line into its portfolio and rebranding the chips XScale. Intel later sold its communications and application processor business, including the XScale line, to Marvell for $600 million in June 2006. 

Apple is schedule to report quarterly results today after the closing bell. More information on the acquisition is expected at that time. The acquisition also comes within range of Apple's June WWDC. 

"Apple is probably going to have a second-generation iPhone within weeks," Doherty said, noting that Envisioneering Group expects the next iPhone to premier at or around WWDC. "Apple needed to lock and load this because they are going to have their WWDC and are freeing up their SDK over the next eight weeks. Developers who in the past have worked with [the likes of] Nokia, Windows Media, and Windows Mobile [are showing] tremendous enthusiasm, from the hackers to the established developers, to make the iPhone work."

Electronic News could not reach Apple for comment.