Is Apple's Advantage Insurmountable?

That's what IBM, Microsoft and Google thought, too. But maybe this time it is different. Maybe. JL

Steve Cheney comments in his blog:

iOS is the ultimate platform. Developers make unprecedented money off of it, consumers the world over love it, and Apple owns an entire market’s profits in a non-monopolistic way—unlike platforms past.
Since the iPhone 6s was released last month anyone who has used the device says it feels like magic. Apple – as a platform company – is so far above the competition it’s hard to fully grasp.
There are reasons why pushing down on 3D Touch feels better than any device people have ever touched, and it’s not entirely clear whether it’s the software or what’s inside that plays the larger part. The iPhone 6s presents itself in a way that lets you feel unconsciously in control yet expressive and free.
Last week we saw news from Apple teardowns that both Samsung and TSMC were commissioned to produce different variants of the A9 processor, basically two designs of the same chip, each optimized using a different process and library. Many people focused on their performance discrepancy, when the interesting part is actually Apple’s power and control over suppliers.
Just as there are many misunderstood reasons for Apple’s overall success, justification as to how Apple produces superior products isn’t superficially visible. This is always the case with the silicon inside of computers.¹
It always surprises me how few people talk of or understand Apple’s silicon-making advantages. In early 2010 when the A4 saw the light of day I wrote why assembling an internal chip team would allow Apple to become a truly dominant platform company.

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.

In the past five years these barriers have become totally insurmountable. iOS is the ultimate platform. Developers make unprecedented money off of it, consumers the world over love it, and Apple owns an entire market’s profits in a non-monopolistic way—unlike platforms past.
Platform dominance has also played out as I mentioned. Device makers (Samsung et al) and OS makers (Google, Microsoft) are not making money off smartphones.² This is simply staggering to fully comprehend, and foretells ramifications few can see.
One of Steve Jobs’ biggest legacies was his decision to stop relying on 3rd party semiconductor companies and create an internal silicon design team.³ I would go so far as to argue it’s one of the three most important strategic decisions he ever made.
In 2007, when Steve Ballmer famously declared “There’s no chance that the iPhone is going to get any significant market share. No chance”, Jobs was off creating a chip design team. If you study unit economics of semiconductors, it doesn’t really make sense to design chips and compete with companies like Intel unless you can make it up in volume. Consider the audacity back in 2007 for Apple to believe it could pull this off. How would they ever make back the R&D to build out a team and pay for expensive silicon designs over the long run, never mind design comparative performing chips? Well today we know. Apple makes nearly 100% of the profit in the entire smartphone space.
It is – in fact – these chip making capabilities, which Jobs brought in-house shortly after the launch of the original iPhone, that have helped Apple create a massive moat between itself and an entire industry.
Ultimately this chip advantage is one of the little spoken, but critical elements in Apple’s vertically integrated approach. Android OEMs can copy the fingerprint sensor or the 3D Touch mechanism. They just go to the supplier that Apple buys it from. But they can’t copy the underlying software powering these ‘commodity’ chips.
One lens that helps assess the asset value of a buy vs build strategy is called buyer / supplier bargaining power. Because of Apple’s scale in smartphones, and re-use of chips in other device categories like the watch and TV, Apple has massive influence with suppliers. They can plan 3-5 years out and decide what to license, build, invest in, or buy.⁴ It also has allowed Apple to decouple control. e.g. in producing two ‘different’ A9 chips, Apple thwarts abilities of TSMC and Samsung to hike prices or walk away.
So… making chips serves as the moat around untold strategic advantages: development secrecy, hyper optimization, supplier negotiating power, etc. And all the while smartphone market volume serves as ‘R&D lead gen’ for new products in entirely new industries (tablet, watch, TV, car). By owning its own silicon design team, Apple is able to leap into other markets which will be eaten by software running on cheap silicon.
Building competent semiconductor design capabilities is an absolutely massive endeavor. Especially as there isn’t much VC investment going in to chip startups anymore. Almost none actually. Owning this was quintessential strategy on the part of Jobs. In the past 7 years since Apple got serious about designing silicon, they have effectively surpassed the performance of Intel. This has been well documented.⁵ The fact that Apple’s sexiest new products don’t even consider using Intel’s latest technology is a lagging indicator of how innovation in PCs got blown away by what happened in the mobile ecosystem.
The truth is the best people in chip design no longer want to work at Intel or Qualcomm. They want to work at Apple. I have plenty of friends in the Valley who affirm this. Sure Apple products are cooler. But Apple has also surpassed Intel in performance. This is insane. A device company – which makes CPUs for internal use – surpassing Intel, the world’s largest chip maker which practically invented the CPU and has thousands of customers.
This pedigree that Apple developed now has a secondary powerful force: portable devices serve as the reference platform whereby all chip design starts. Components from the smartphone market now power almost all other markets, giving Apple’s in-house team a comparative advantage as they enter new product categories, like wearables and electric cars.
All of this supplier / buyer power that Apple has secured will be extended to cars. And because cars are lower volume by many orders of magnitude than phones, no other car maker will be able to enter the chip making game. Both the costs and the risks of designing chips are way too high. Tesla sells around 100K cars a year. Apple sold that many iPhones every 30 minutes on opening day weekend.
If you believe the leaks, Apple wants to have a car ready in 2019. So how will this comparative advantage manifest in cars? The best reference is Tesla, whose sheer mastery of electric vehicles undoubtedly kick-started Apple into this market. Last week Elon Musk made some fascinating remarks about Apple in a public interview:

It’s good that Apple is moving and investing in this direction. But cars are very complex compared to phones or smartwatches. You can’t just go to a supplier like Foxconn and say: Build me a car. But for Apple, the car is the next logical thing to finally offer a significant innovation. A new pencil or a bigger iPad alone were not relevant enough.

So is the Apple Car just an iPad on wheels? Of course not. The industrial design as well as everything associated with making a car as spectacular as Tesla is a massive undertaking. Apple may or may not be successful here.
But when you look through the lens of the car as a mobile device, the software and silicon look markedly similar. It’s clear electric cars will rely on 100% of the supply chain of the smartphone industry and will use the same operating systems that phones use. They will use the same CPUs, the same wireless chipsets, and run on the same advanced mobile networks.⁶
One posit you can derive from this is that no other car manufacturer in the world can support an internal chip team unless they also sell phones. The gravitational pull of the smartphone feels much more pronounced when you rationalize this.
How does this impact electric cars, and eventually autonomous cars? An Apple Car could be almost exclusively Apple under the hood—Apple software running on Apple silicon using Apple materials. Other car makers will be effectively running off the smartphone supply chain using a version of Android that Google promotes for cars or some variant of Linux (good luck running apps on that), or ironically, iOS.
All of this is why Apple exec Jeff Williams said in May at the Re/Code conference that “The car is the ultimate mobile device”. Provocative to think about. Everything smart in the car originates from a mobile device. It will run the same software and use the same chips as the iPhone and the Watch and the Apple TV. Apple will assemble metal and plastic around software and hardware and attempt to differentiate on an axis familiar to them – industrial design, user experience, marketing and brand.
Could Apple build a killer car by 2019? Yes. The real question is whether Apple could build a car with basically no design dependencies on any other suppliers.
One of the biggest missing components here is batteries. But all of Apple’s products also rely heavily on batteries (for a different reason of course – to power silicon and displays vs electric motors). One signal to watch will be CapEx investment (either R&D or outside investment) that Apple makes in battery tech. And of course any investments in battery tech will also serve them well in handheld devices and wearables.
It’s also known in inner circles that Apple has embarked on design of radio interface (RF) chips that traditionally were off limits to all but the most advanced chip makers like Qualcomm. These chips rival CPUs in complexity. Apple is now designing these to spec and will be putting its own radios into future mobile devices. This has physical layer impacts on bandwidth, connectivity, latency and user experience—all critical for autonomous vehicles.
Let’s go on a thought experiment and predict the future here. Actually let’s end on facts because we can’t. But one thing is very clear: we are entering an era where cars will become smart, navigate by themselves and autonomously courier people and goods. And just as computing spawns a different set of winners every decade, you can bet the next set of car makers will look much different than today’s. Google, Uber and Tesla will all be involved… And although we know almost nothing of Apple’s plans, they’ve built the platform foundation which gives them a chance to delight and inspire us, like only Apple can.

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1. One of Intel’s smartest moves ever was marketing ‘Intel Inside’ because it gave them leverage with PC manufacturers and encouraged consumers to focus on what chip was inside. ↩
2. I am referring to direct money. It’s well documented that Google provides Android free in order to profit off complementary services and through advertising. It’s also telling to watch Microsoft try to go up channel and build devices, though they lack an internal chip team. ↩
3. Jobs started small yet strategic, brilliantly cherry picking PA Semi and Intrinsity, startups worth a tenth of a percent of Intel. ↩
4. Semiconductor design cycles are typically 2 years minimum so buying this amount of time is really valuable—other tech companies must react on much shorter scales. ↩
5. The iPad Pro, which runs the A9, compares to the most recent MacBooks running Intel. Undoubtedly within 1 to 2 cycles of Moore’s Law, Apple ARM chips will be superior in performance per watt to Intel x86. ↩
6. Maybe even dedicated ones that are more advanced. ↩