On Apple’s Vertical Silicon Strategy
An alternative title for this piece could be ‘Why Vertically Converged Mobile Platforms Have Won Over Modular’. Over the weekend Ben Thompson wrote an eloquent essay relating the iPhone’s success to disruption theory in mobile / consumer markets.
Mobile has always been evolving differently, and 3.5 years ago I wrote a post called The Genius in Apple’s Vertical Platform referencing how Apple’s vertical (non-modular) approach allows it to innovate faster (my emphasis added):
“Apple’s DNA in this area is untouchable, helping it to innovate at the confluence of software and hardware. There’s a reason why pinching and zooming on the iPad is snappier than anything people have ever seen, and it’s not entirely clear whether the software or hardware plays the larger part.”
A few days ago we finally saw real life numbers on just how much snappier iOS7 is than Android—Apple phones are 2.5x faster than the fastest Android phones. Think about this for a second—in an age of decreasing latency in a “mature” market, such an advantage is almost unbelievable. Imagine how many times you pinch, zoom and scroll on your smartphone daily. Everything is 2.5x faster with Apple.
Is this performance gap endemic of a consolidated “good enough” market? The answer is categorically ‘No’. Say what you will about Apple vs Android in price or market share optimizations for low-end markets, one thing is absolutely clear: Apple’s silicon strategy is a secret weapon in allowing true converged experiences, consumers will pay for this, and in 2013 iOS continues to dominate competing platforms in system efficiency.
Since I wrote that piece, every other major mobile company has switched over to a strategy of vertical integration. But often their strategies are viewed superficially at the “box” level, or up the stack at services. So Google bought Motorola and makes handsets, that’s a truly converged platform play right? And now that Nokia has been rolled up, this enables a much better product, right?
What is missed is that despite others vertically integrating, Apple still has no current peers underneath the hood, at the silicon level. Let’s step back to 2010 again to a different piece I wrote detailing Apple as a platform company across software and chips.
“So the move to vertically integrate chip development helps Apple erect barriers and become a dominant platform company. This spells a larger trend – it is no longer adequate to simply be a device or software company to succeed.”
Despite today’s trend to vertical integration, Apple stands alone in its ability to integrate at the system level. The truth is silicon is the alchemy which causes consumers to marvel when they hold or touch an iPhone.
This fact is not lost on Tim Cook, who at the operations level understands silicon better than nearly any business leader. In this week’s Business week interview, this was very apparent:
“Now, we’re well beyond just the surface level of design of hardware and software. We’re deep in the guts. This week you saw the A7. You saw our new M chip. Well, these are only possible because many years ago we elected to start building our own silicon team, and now we have many, many people designing silicon.
And you saw us go to 64-bit. Well, why are we able to do that first? It’s because we’re at that level of being vertical. Does anybody—do these other three companies have silicon expertise? You can answer that. Maybe they have something that I’m not aware of, but in terms of the depth of it …
So it will be interesting in the next round, the next wave, to see what happens there. What do people do? When we looked at it, we concluded we needed to do our own stuff because we were dreaming of products that couldn’t be done with silicon that you could go buy. So we designed our own and built an incredible team.”
So the question now is does Apple’s understanding of silicon continue to enable Tim and company to dream of a future that others can’t. Can Apple continue to distance itself from “junk products” going forward, and will silicon drive this?
The data is clear at iPhone launch that this focus on custom silicon is allowing Apple to lead on performance and power—the A7 benchmarks show this in spades, and I detailed at the software level exactly how Apple performs this magic with silicon and software on its A7.
But looking beyond that, one of the extremely interesting trends to watch is how Apple manages platform control and buyer / seller bargaining power when it makes decisions on levels of modularity. Whereas others conflate vertically integrating as a single designation, it’s really a gradient of decisions that in sum make up the platform.
The most revealing find came from the Chipworks teardown of the iPhone 5s showing that the M7 processor (which I wrote about before it was deconstructed here) is actually an SoC manufactured by NXP Semiconductor. This is funny because Tim Cook calls it “our new M chip”. So who’s chip is it?
The truth is, it’s a collaboration, something very difficult to pull off with a vendor. Apple wanted hardware / DSP / sensor assistance, didn’t want to design and fab the chip, and turned to NXP.
Tim Cook knows that buyer and seller bargaining power are largely driven by a company’s market share. If you are Apple you have massive influence with suppliers. And somewhat ironically, Apple’s in-house chip development team gives it even more leverage with suppliers—they know so much about silicon’s limits. So when Apple specs chips it understands whether certain things are feasible say 1, 3 or 5 years out. They know what to license, build, invest in, or buy.
Together, Apple’s supplier bargaining power and silicon knowledge, mean that Apple can push merchant vendors harder, obtaining semi-custom chips that no one else can get. Make no mistake, the M7—though manufactured by NXP—is not available as a standard product. Even if something similar is sold by NXP in the future, it won’t be optimized at the system level.
These points of collaboration started years ago and allow Apple to essentially treat silicon as a commodity they control, adjusting ‘make vs buy’ strategies years ahead of competitors, while wielding incredible power over suppliers. The results in a halo around platform evolution at the silicon level that is unmatchable.
It is simply not good enough to dress up hardware, chips and cameras together with services and call it state-of-the-art. Sure, cheap Android phones are much better than what was available years ago, but are they as good as consumers want them to be, or as good as the benchmark (Apple) that consumers touch, feel and aspire to have? The answer is unequivocally ‘No’, which is why mobile computing and desktop computing markets continue to diverge even as the world moves from PCs to mobile.
Apple’s incredible silicon advantage will continue to help it to stay agile and maneuver in the face of unrelenting competition in the mobile world. The quantifiable evidence is there—whether it’s the iPhone’s 9M opening weekend sales or the 2.5x better responsiveness when you touch your phone, the proof is undeniable that Apple’s magic is alive.