Fallout from the Apple-Samsung Feud

06/21/2011 8:30 am EST


One of Apple's top suppliers is enmeshed in a high stakes, high-tech feud that could spell opportunity for Intel, observes Paul McWilliams of Next Inning Technology Research.

News that the feud between Samsung and Apple (AAPL) has heated up recently sparked a number of interesting questions from readers.

Samsung isn't just Apple's largest single semiconductor supplier—it has also been Apple's primary source for wafer fabrication of its A4 and A5 processors [as seen in the company's iconic iPad, iPhone, and iPod Touch—Editor.]

Since the majority of the dollar value Apple purchases through Samsung is directed to NAND Flash memory chips, finding new sources for those wouldn't be a huge problem. But readers are curious how a divorce might impact Apple, and if this suggests the odds of Apple getting together with Intel (INTC) might be improved.

Other readers, however, don't see the logic in Apple moving its fabrication to Intel. Why, they ask, would Intel want to give what they perceive as the company's primary competitor in tablets and smartphones a further advantage, by providing Apple with the world's leading fabrication technology for Apple's current ARM Holdings (ARMH) processors?

While I really don't know how to handicap the odds of Apple and Intel getting together on a fab deal, I can respond with fairly high confidence as to why would Intel even consider doing it.

There's absolutely no doubt that Apple is the reigning king of smartphones and tablets. (Sure, if you aggregate all the various Android-based handsets from the half a dozen manufacturers who are in that camp, Android is out-selling the iPhone. However, in this case, that is not the right way to look at the equation.)

What we have in both the tablet and smartphone market is Apple, and then everyone else. The key here is that the "everyone else" is a fragmented set. Not only does it comprise about a half a dozen handset and tablet vendors, it entails a number of different chip suppliers.

As it stands today, those chip suppliers are dependent on contract wafer-fabrication companies that generally trail Intel by one to two production nodes [essentially, a generation of chips, achieved by making the space between transistors smaller, and therefore fitting more into the same space—Editor.]

And none of them have the new 3D-transistor technology that Intel will soon leverage.

Since Apple doesn't sell its internally designed A5 processor to any outside companies, it is only quasi-competition for Intel (Intel must compete with it for sockets in Apple products, but not products outside Apple).

If Intel began to fabricate the A5, or whatever the next generation is of Apple's processor, it would provide Apple with further price and performance advantages over its already fragmented competition. Particularly hurt would be the chip suppliers that supply the various smartphone and tablet markets that Intel will soon be addressing in earnest.

And precisely because of these increased competitive advantages Apple would enjoy, other smartphone and tablet manufacturers may determine the best way to compete against Apple is to differentiate by using the new, very low cost, and very low power chip solutions Intel will release late this year.

In other words, if Intel gives Apple a lift, it may end up increasing the demand for its processors from "everyone else."

As a matter of fact, I think this would have the potential to change the competitive landscape enough to where the FTC would scrutinize the deal if it is proposed.

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