Apple Case
Apple Case
Apple Case
August 1, 2022
When Steve Jobs co-founded Apple in 1976, his philosophy was to move fast, unencumbered
by norms, and take risks in search of greater rewards. His strategy was to diferentiate Apple by
developing high-end products that consumers craved. “Innovation distinguishes between a leader
and a follower,” Jobs said.1
In 2008, Apple-watchers noticed the company was hiring “chip guys” and wondered why the
company needed the expensive, highly skilled engineers who designed silicon microprocessors,
the heart of computing devices. Teir questions were answered when the iPad and iPhone 4 were
launched in 2010 with the A4, a custom “system on a chip” (SoC)* designed by Apple. Previous
generations of iPhones and iPads had used non-customized Samsung chips. Samsung had angered
Apple when, in 2009, it introduced a smartphone resembling the iPhone that used the same chips.
After Tim Cook became Apple’s CEO in 2011, he extended Jobs’s pioneering vision with what
came to be known as the “Cook Doctrine”: that Apple had a “long-term strategy of owning and
controlling the primary technologies behind the products we make.”2 In June 2020, in an echo of
its decision a decade earlier to design its own mobile-device chip, Apple announced that it would
begin designing the microprocessors inside its new Mac computers and end its 15-year partnership
with Intel. “When we look ahead, we envision some amazing new products, and transitioning to
* In addition to a microprocessor, an SoC combined graphics, memory, and other functions in one integrated circuit
(or chip).
© 2022 by the Kellogg School of Management at Northwestern University. Tis case was prepared by Professor
Meghan Busse and Susan Springer. Cases are developed solely as the basis for class discussion and are not intended to
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APPLE’S CUSTOM CHIPS: A GENIUS DECISION? KE1225
our own custom silicon is what will enable us to bring them to life,” Cook said at a conference that
month.3
Semiconductor Fabrication
Designing and manufacturing semiconductors are two distinct functions that historically were
handled by a single frm. Examples of such integrated device manufacturers (IDM) include Intel,
Samsung, and Texas Instruments.
In 1987, Taiwan Semiconductor Manufacturing Co. (TSMC) was founded as the frst pure-
play semiconductor foundry. TSMC did not design, manufacture, or market any semiconductors
of its own. Instead, TSMC manufactured semiconductors solely on behalf of customers for various
applications, including mobile devices, automotive, Internet of Tings (IoT), and computing. In
2020, TSMC manufactured 11,617 diferent products for 510 customers.4
ARM
Arm Ltd. was a British semiconductor frm spun of from an early PC maker, Acorn Computers,
which introduced its frst personal computer in 1981, the same year IBM did the same with its PC.
Arm Ltd. is the creator of ARM, a family of microprocessor instruction sets. Unlike Intel, which
was both the creator of an architecture (the X86 family) and the manufacturer of microprocessors,
Arm Ltd. did not manufacture microprocessors. Instead, it licensed its architecture to other frms
that wanted to design chips.
Arm Ltd. ofered several types of licenses under which a chip designer could use the
ARM architecture. A core license allowed a chip designer to use the ARM IP cores to create
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KE1225 APPLE’S CUSTOM CHIPS: A GENIUS DECISION?
a microprocessor suitable for a desired application. ARM IP cores could be used to construct
something as simple as a low-power environmental sensor to measure temperature or as powerful
as a superfast cloud-server processor.9 ARM architecture originally was used in smartphones,
personal digital assistants, and other mobile devices. In 2009, several manufacturers introduced
laptop computers with ARM architecture central processing units (CPUs).
In 2016, Arm Ltd. introduced the “Built on Cortex” license, which allowed companies, in
partnership with Arm Ltd., to make modifcations to ARM Cortex chip designs. Tese semi-
custom designs were not shared with other licensees. An architectural license allowed companies
to design completely custom CPUs using ARM instruction sets.
ARM Flexible Access, Arm Ltd.’s most variable license yet, was introduced in 2019. Under this
one, a licensee had unlimited access to ARM intellectual property and paid Arm Ltd. per unit for
the resulting product. Using these more fexible licenses, designers were able to create chips that “are
compatible with Arm’s ecosystem, because they use the same ‘instruction set.’ Tis computational
lingua franca constitutes the most basic level at a device’s software talks to its hardware. Te result
is a vast ecosystem of companies, all speaking Arm’s processing language.”10
Te combination of form and function developed into an explicit luxury positioning for
Apple’s products. Apple’s brand value—the likelihood that consumers would choose a brand
over others, even if it cost more—was the highest of all technology companies.11 Tis positioning
supported Apple’s pricing strategy of not competing on price and rarely discounting its products.
It limited distribution by ofering only small quantities to big-box retailers and driving potential
customers to experience its products in its own retail stores that provided a high level of service and
support in an aesthetically distinctive setting.
In 2020, the personal computer market saw its biggest growth in a decade. Spurred by
increases in remote work and learning due to the COVID-19 pandemic, total estimated global
shipments were approximately 300 million units, up about 12% from 2019. Lenovo was the top
PC vendor, followed by HP and Dell.12 Apple was in fourth place with approximately 23 million
Mac shipments and a market share of nearly eight percent.13 In 2020, Apple’s market share of the
global smartphone market was 15%, compared to 19% for Samsung, 11% for Xiaomi, and about
8% each for OPPO and Vivo.*
* Tis calculation was based on information obtained from “Global Smartphone Market Share: By Quarter,”
accessed November 9, 2021, https://www.counterpointresearch.com/global-smartphone-share/.
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APPLE’S CUSTOM CHIPS: A GENIUS DECISION? KE1225
Apple sourced a variety of iPhone components from Samsung, including displays, circuit
boards, memory, batteries, and SoCs.15 But this relationship was uncomfortable because Samsung
soon became Apple’s biggest rival in the global smartphone industry.16 Samsung operated with
three chief executives, an arrangement meant to keep a frewall between Samsung’s smartphone and
component units.17 Despite this, Apple sued Samsung in 2011 for patent infringement. Samsung
countersued for patent infringement, launching what Steve Jobs called a “thermonuclear” legal
war.18 (Te case was fnally resolved in 2018, in Apple’s favor, requiring Samsung to pay Apple
$539 million in damages.19)
Refecting on this time, Johny Srouji, senior vice president for hardware technologies at Apple,
recalled, “Steve [Jobs] came to the conclusion that the only way for Apple to really diferentiate
and deliver something truly unique and truly great, you have to own your own silicon. You have
to control and own it.”20
In 2008, Apple had a team of about 40 hardware engineers that integrated chips from various
suppliers into the iPhone. By the time Apple launched its iPad and iPhone 4 in 2010, its hardware
team had grown to hundreds of engineers and had designed a new chip, the A4, customized for
Apple’s mobile devices. Te new chips forced developers to rewrite their apps to work with the new
instruction sets, and the new apps were more responsive and used less memory. More important,
the new SoC supported the iPhone’s high-pixel density retina display. Two years later, enhanced
versions of the chip supported high-density displays for the iPad.
Apple continued improving its SoC designs through the 2010s to support features such as
fngerprint identifcation, video calling, Siri (the iPhone’s voice-activated assistant), Apple Pay,
Touch ID, and photo burst mode. Te neural engine module in Apple’s chip enabled a new iPhone
portrait mode that not only blurred the background but also allowed the depth of feld to be
adjusted after the picture was taken. Face ID and augmented reality (AR) were two other features
made possible by the Apple-designed chips.21
Te company also designed dedicated chips for specifc products and features. One chip for its
AirPods earbuds and Beats headphones delivered faster Bluetooth pairing, automatic reconnection,
and longer battery life. Another for ultra-wideband enabled a directional version of AirDrop
wireless fle sharing and precise locating of other Apple devices while also increasing battery life.
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KE1225 APPLE’S CUSTOM CHIPS: A GENIUS DECISION?
Trough the 2010s, Apple greatly expanded its chip division by hiring thousands of new
engineers and acquiring more than a half-dozen semiconductor companies. All of this activity was
not cheap; R&D expenses hit a record $18.75 billion in fscal 2020, an increase of $2.5 billion
from the previous year.22 In the summer of 2020, an independent technology analyst estimated
that Apple’s built-for-purpose parts accounted for 42% of the costs of core iPhone components,
compared with 8% in 2016. 23
Apple did not manufacture the chips it designed, instead relying on Samsung and TSMC for
that activity; semiconductor fabrication was a highly technical business that required multibillion-
dollar investments in huge plants, or foundries.
Despite its progress on microprocessor design, Apple remained reliant on third-party suppliers
for other key components, such as displays (Samsung) and cellular modems (Qualcomm).
Changing to a microprocessor with a diferent architecture would mean none of the existing
macOS software could run on new Macs until that software was rewritten to function in the
Intel x86 architecture instead of the PowerPC architecture. To avoid creating problems for its
customers and to ease the burden for its developers, Apple shipped the new Intel-based Macs with
a built-in software emulator (a layer of software between the operating system and applications)
called “Rosetta.” Named after the Rosetta Stone, an archeological discovery that helped scholars
frst decipher Egyptian hieroglyphs, Apple’s Rosetta translated PowerPC instructions to Intel
instructions. Tis feature enabled all existing Mac software to run on all Apple computers,
including those with Intel chips.25 Rosetta enabled Apple to complete the transition faster than
expected and with minimal disruption to its developers and customers.
In April 2018, a journalist leaked Apple’s plans to replace the Intel microprocessors it had used
in its Mac computers for more than a decade with chips of its own design. Te new chips would
use the same ARM architecture as its chips for the iPhone and iPad. Although ARM architecture
chips were used in nearly all mobile devices, the architecture was not widely found in computers.
Apple was frustrated that the pace of Intel’s microprocessor development was not keeping
up with the company’s product launch plans. “Apple felt limited by Intel because sometimes the
products they wanted to launch and the silicon chips Intel had available were out of sync. Now
they can line up the design of the silicon, software, and hardware to deliver one thought-out
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APPLE’S CUSTOM CHIPS: A GENIUS DECISION? KE1225
product that’s better in power and performance,” a tech industry analyst said,26 Tis stood in
contrast to iPhones and iPads, for which Apple’s use of its own chips had boosted performance and
had increased the company’s control over future releases.
Analysts noted that the ARM chip architecture Apple planned to use was efcient but not yet
as powerful as Intel’s, and they doubted that the Apple chip would be able to catch up before its
expected launch. An industry observer speculated that Apple was trying to achieve an objective
other than raw computing power. It seemed to industry analysts that by attempting to integrate
iOS and macOS, Apple was examining ways to combine hardware and software platforms.
“It makes sense that they’re going in this direction,” the tech consultant said. “If you look at
incremental R&D spend, it’s gone into ways to try to vertically integrate their components so they
can add more functionality for competitive diferentiation.”27
Apple explained that the switch to a common chip architecture across its computers, tablets,
and smartphones paved the way for greater integration by “making it far easier for developers to
write and optimize software for the entire Apple ecosystem.”28 For example, it would provide the
opportunity for more iPhone mobile app developers to design for Macs, knowing their apps could
run seamlessly. “At Apple, integrating hardware and software is fundamental to everything we do,”
Cook said in June 2020 at the Apple Worldwide Developers Conference. “Tat’s what makes our
products so great, and silicon is at the heart of our hardware.”29
Te new chips for Macs would improve battery life, allow for faster processing speeds, and
support new security features.30 Analysts said insourcing chip design could give Apple a two-year
lead on performance, thanks to the company’s ability to plan how multiple chips could work
together to limit power consumption and make more space available inside devices.31 Te new
chips would also enable new features for Macs that already were available in iPhones, such as image
processing through machine-learning algorithms. In addition, according to analysts’ estimates,
Intel charged Apple about $75 to $150 more per chip than Apple would pay TSMC to build a
chip of Apple’s own design.
At the June 2020 Apple conference, the company announced the beginning of a two-year
transition from Intel chips in Macs to chips designed in-house and produced by TSMC. As it did
when it switched from IBM to Intel microprocessors, Apple planned to incorporate emulation
technology (Rosetta 2) to enable existing Intel-based software applications to run on the new Macs
until the applications were updated to work with the new Apple chips.32
In November 2020, Apple unveiled three new Mac computers that used its M1 processor,
which was packed with an “astonishing 16 billion transistors,” and integrated the central processing
unit, the graphic processing unit, the neural engine (a processor for machine learning models),
and input/output, among other things. Apple touted its “huge increase in graphics performance”
and “category-smashing speed, mind-bending graphics, and power efciency and battery life that
defy belief.”33 However, the company didn’t provide details of benchmark tests that could support
its claims, which prompted one analyst to write, “Performance of the new M1 chip is nearly
impossible to gauge as the company didn’t provide any detailed substantiation around any of
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KE1225 APPLE’S CUSTOM CHIPS: A GENIUS DECISION?
the performance claims made.”34 In addition, the new M1 chip did not support external graphic
processing units for online game play, a feature that was part of Intel’s design.
One online technology publication wrote at the end of 2020 that Apple’s “M1 chip carries
numerous special-purpose accelerators that enable performance and capabilities not accessible to
of-the-shelf CPUs, which changes the way Apple’s PCs can be used.” Smartphone companies,
including Huawei and Samsung, had developed their own smartphone SoCs to ofer a unique user
experience, reduce costs, and better control their products, but Apple had gone further to build
“its own highly-integrated SoC for its Macs, which appeared to be quite powerful when compared
to x86 processors from Intel, based on early reviews.” 35
More to Come
In January 2021, news leaked that Apple was planning the frst redesign of its iMac all-in-one
desktop computer since 2012. Te new models would continue the transition away from Intel
processors and use next-generation versions of Apple’s own processors.36
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APPLE’S CUSTOM CHIPS: A GENIUS DECISION? KE1225
Endnotes
1 Ben Woo, “‘Innovation Distinguishes Between A Leader And A Follower,’” Forbes, February 14, 2013,
https://www.forbes.com/sites/greatspeculations/2013/01/09/hard-to-imagine-steve-jobs-running-apple-this-
way/?sh=2ad5a8821509.
2 Dylan McGrath, “Apple’s iPhone Sales Down Again,” EETimes, July 31, 2019, https://www.eetimes.com/apples-
iphone-sales-down-again/#.
3 Jack Nicas, “Apple to Ditch Intel Chips in Macs as It Consolidates Its Power,” New York Times, June 22, 2020,
https://www.nytimes.com/2020/06/22/technology/apple-macs-intel-chips.html.
4 “About TSMC,” TSMC website, accessed November 8, 2021, https://www.tsmc.com/english/aboutTSMC.
5 Prableen Bajpai, “An Overview of the Top 5 Semiconductor Foundry Companies,” NASDAQ, October 1, 2021,
https://www.nasdaq.com/articles/an-overview-of-the-top-5-semiconductor-foundry-companies-2021-10-01,
accessed November 8, 2021.
6 Asa Fitch, “Chip Giants Intel and Nvidia Face New Treats from Amazon to Google to Apple,” Wall Street
Journal, December 20, 2020, https://www.wsj.com/articles/chip-giants-intel-and-nvidia-face-new-threats-from-
amazon-to-google-to-apple-11608460201.
7 Asa Fitch and Euirim Choi, “Lisa Su’s AMD Is Flying High as Rival Chip Maker Intel Stumbles,” Wall Street
Journal, August 6, 2020, https://www.wsj.com/articles/lisa-sus-amd-is-fying-high-as-rival-chip-maker-intel-
stumbles-11596732408.
8 “What Is an IP (Intellectual Property) Core in Semiconductors?”, Anysilicon, accessed November 8, 2021,
https://anysilicon.com/ip-intellectual-property-core-semiconductors/.
9 Christopher Mims, “Intel Not Inside: How Mobile Chips Overtook the Semiconductor Giant,” Wall Street
Journal, December 12, 2020, https://www.wsj.com/articles/intel-not-inside-how-mobile-chips-overtook-the-
semiconductor-giant-11607749203.
10 Ibid.
11 Terese Wood, “Te World’s Tech Giants, Ranked by Brand Value,” Visual Capitalist, August 4, 2020,
https://www.visualcapitalist.com/the-worlds-tech-giants-ranked/.
12 Tom Warren, “Te PC Market Just Had Its First Big Growth in 10 Years,” Verge, January 11, 2021,
https://www.theverge.com/2021/1/11/22225356/pc-sales-shipments-2020-growth-idc-canalys-remote-work.
13 “PC Sales Remain on Fire as Fourth Quarter Shipments Grow 26.1% Over the Previous Year, According to
IDC,” IDC, January 11, 2021, https://www.idc.com/getdoc.jsp?containerId=prUS47274421.
14 Brad Stone, Adam Santariano, and Gwen Ackerman, “Te Most Important Apple Executive You’ve Never
Heard Of,” Bloomberg Businessweek,” February 18, 2016, https://www.bloomberg.com/features/2016-johny-
srouji-apple-chief-chipmaker/.
15 Timothy W. Martin and Tripp Mickle, “Why Apple Rival Samsung Also Wins If iPhone X is a Hit,” Wall
Street Journal, October 2, 2017, https://www.wsj.com/articles/why-apple-rival-samsung-also-wins-if-iphone-x-
is-a-hit-1506936602.
16 Jessica E Lessin, Lorraine Luk, and Juro Osawa, “Apple Finds It Difcult to Divorce Samsung,” Wall Street
Journal, June 28, 2013 https://www.wsj.com/articles/SB10001424127887324682204578513882349940500.
17 Martin and Mickle, “Why Apple Rival Samsung Also Wins.”
18 Ibid.
19 “Jury Awards Apple $539 Million in Samsung Patent Case,” Reuters, May 24, 2018,
https://www.nytimes.com/2018/05/24/business/apple-samsung-patent-trial.html.
20 Stone, Santariano, and Ackerman, “Te Most Important Apple Executive You’ve Never Heard Of.”
21 Tom Simonite, “How Apple Makes the AI Chip Powering the iPhone’s Fancy Tricks,” Wired, September 18,
2018, https://www.wired.com/story/how-apple-makes-ai-chip-powering-iphones-fancy-tricks/.
22 “Apple Inc’s Expenditure on Research and Development from Fiscal Year 2007 to 2020,” accessed November 10,
2021, https://www.statista.com/statistics/273006/apple-expenses-for-research-and-development
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KE1225 APPLE’S CUSTOM CHIPS: A GENIUS DECISION?
23 Tripp Mickle, “Apple Is the Newest Chip Giant in Town,” Wall Street Journal, June 15, 2020,
https://www.wsj.com/articles/apple-is-the-newest-chip-giant-in-town-11592910000.
24 “IDC: Apple Mac 2005 U.S. Market Share 4% on 32% Growth Year over Year,” MacDailyNews, January 20,
2005, https://macdailynews.com/2006/01/20/idc_apple_mac_2005_market_share_4_on_32_growth_year_
over_year/.
25 Tripp Mickle, “Apple Drops Intel for In-House Chips in Major Makeover of Mac Computers,” Wall Street
Journal, June 22, 2020,
https://w w w.wsj.com/articles/apple-expected-to-break-up-with-intel-transition-to-in-house-chips-for-
macs-11592844482.
26 Ibid.
27 Ian King and Mark Gurman, “Apple Plans to Use Its Own Chips in Macs From 2020, Replacing Intel,”
Bloomberg, April 2, 2018, https://www.bloomberg.com/news/articles/2018-04-02/apple-is-said-to-plan-move-
from-intel-to-own-mac-chips-from-2020.
28 “Apple Announces Mac Transition to Apple Silicon,” Apple Inc., June 22, 2020, https://www.apple.com/
newsroom/2020/06/apple-announces-mac-transition-to-apple-silicon/.
29 Mickle, “Apple Drops Intel.”
30 Ibid.
31 Mickle, “Te Newest Chip Giant in Town.”
32 “Apple Announces Mac Transition.”
33 “Apple Event November 10, 2020,” Apple Inc., accessed March 3, 2021, https://www.apple.com/apple-events/
november-2020/?useASL=true.
34 Jack Nicas and Don Clark, “Apple Introduces New Macs With the First Apple Chips,” New York Times,
November 10, 2020, https://www.nytimes.com/2020/11/10/technology/apple-chips-intel.html.
35 Anton Shilov, “Google Developing Own Processors for Smartphones & Chromebooks,” Tom’s Hardware,
December 4, 2020, https://www.tomshardware.com/news/google-developing-own-processors-for-smartphones-
and-chromebooks.
36 Mark Gurman, “Apple Plans First iMac Desktop Redesign in Nearly a Decade,” Bloomberg, January 15, 2021,
https://www.bloomberg.com/news/articles/2021-01-15/apple-plans-redesigned-imac-new-mac-pro-smaller-mac-
pro-cheaper-monitor.
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