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The Trials and Tribulations of Vertical Integration
AUG 02, 2017 01:04 AM
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The Trials and Tribulations of Vertical Integration

By Dr. Jon Peddie, Jon Peddie Research
 
There are two types of organizations in the computer and mobile industry - device makers who are, to the extent they can be, vertically integrated, and component or IP suppliers that offer their product or technology across several vertical product types to the device makers.
 
A successful salesman once told me, “sales is easy, just listen to the customer—he’ll tell you what he wants to buy.”
 
Apple has been telling Imagination Technologies for years what Apple wanted to buy, and Imagination has been delivering the desired designs since 2006. Some people have even suggested that Apple has been largely responsible for Imagination’s technology development roadmap. Apple is what Imagination calls a lead partner, which puts it in a position to make inputs to Imagination’s roadmap— a status which has been enjoyed by other customers, including Intel, TI, Renesas etc., so Apple can’t take full credit.
 
Intel pursued Apple for years and finally Apple told Intel what it wanted to buy. Intel built it, and in the process created a new low-power and powerful mobile processor (Core/Penryn). Apple also told Intel what it wanted in an embedded GPU, which resulted in Intel improving its integrated GPU to the point where Intel dropped Imagination as a GPU IP provider for its Atom processors. And recently, wanting even more GPU power, Apple allegedly insisted that Intel combine an AMD GPU in a multi-chip, low-profile part with an Intel x86 processor (which contrary to popular chatter does not require Intel to get a license from AMD).
 
Then, in April 2017 Apple announced it would no longer use Imagination’s GPU IP in its iOS devices, and would instead design its own GPU.
 
Apple’s abandonment of Imagination Technologies’ GPU, in favor of an in-house design is bold, and questionable. Imagination is looking into the possibilities of patent infringement, and it probably will find it.
 
“Apple has not presented any evidence to substantiate its assertion that it will no longer require Imagination’s technology, without violating Imagination’s patents, intellectual property and confidential information,” Imagination said.
 
“This evidence has been requested by Imagination but Apple has declined to provide it. Imagination believes that it would be extremely challenging to design a brand-new GPU architecture from basics without infringing its intellectual property rights. Accordingly, Imagination does not accept Apple’s assertions.”
 
Imagination has said it reserves the right to sue Apple for unauthorized use of its confidential information and intellectual property. Pursuing that course might be tricky for Imagination, which does not currently have deep cash reserves. Note, I say currently: we will come back to that later.
 
Imagination may get a small concession from Apple for its discovery efforts. Apple’s future GPU is likely to be more like an AMD GPU, however, and if it is, then AMD too will feel the goodbye kiss on the cheek— “It’s not you AMD, it’s me….”
 
As is well known, Apple used the concepts of the classic binding model from OpenGL and applied it to OpenCL, and in so doing abandoned the Khronos industry standard OpenGL and OpenGL ES as well as Vulkan API— all of which point of that vertical integration thing. Apple did that for reasons of control and to discourage portability of iOS-based applications to other platforms, demonstrating once again the company’s strong desire for control over its product and ecosystem. Such a move isn’t illegal but it is anti-competitive by locking developers into its platform, and forcing the ones who can afford it to support two APIs.
 
A common API generally needs a common OS, not necessarily, but preferably. Apple has also established its own OS and spread its kernel across both its ARM processors in iOS and the Intel processor in it macOS High Sierra (OS X), which must’ve inspired no little envy and motivation to Microsoft in its efforts to have Win 10 run on ARM. Eventually the two Apple operating systems will likely merge and when (if) they do, a Mac will still behave like a Mac and iThings will operate the same, and both platforms will share apps and file compatibility. The main difference between them now is the UI. Nonetheless, it is another demonstration of the almost maniacal desire for control of everything in the Apple product sphere.
 
Since Apple uses AMD AIB’s in the Mac Pro, and discrete GPUs in the MacBook, it makes sense to use the same type of GPU in its systems that have integrated GPU—one common code set. And when you can dictate to your suppliers why shouldn’t Apple do that? Intel is trying to get its modem established in Apple mobile devices by positioning it against Qualcomm. Apple knows that and so it can get concessions—and just tell Qualcomm, we’re not going to pay you—how’s that for taking control of your stack? Using a second source to get price concessions from the primary supplier isn’t new, or evil. Not paying your bills because you don’t like the price of IP is something different. So, Intel should be careful of it what it wishes, Apple might just say thanks for the fish and modems, the door’s over there, show yourself out will ya? 
 
Advances in Information Visualization

                                                   Time chart of OS, API, GPU, CPU                                            

 

Apple has always operated on the principle of diminishing the supplier’s power; to be the dictator rather than the dictated, from the assembly line to the IP and all the parts in between.
 
The problem with that philosophy is it narrows Apple’s opportunity to innovate at the foundation level (not just Apple, any company that follows such a philosophy). As clever and rich as Apple is today, it can’t be the smartest, fastest, or best at everything that goes into a complex always on computer—no company can. And yet the company is cutting itself off from the opportunity to leverage the innovation of the industry at large. It has severed ties with Imagination Technologies, Khronos, and refused to pay Qualcomm for its IP. It uses ARM in name only, and has twisted Intel around into doing its bidding—Intel! Who gets to tell Intel what to do? And, AMD will be added to the list. All that, in the name of cutting costs and being vertically integrated, puts Apple in even more of a bunker mentality, and narrows its options and opportunity at innovation—just at a time when it is being questioned in the press and by investors about its ability to innovate. What’s wrong with this picture?
 
The benefit Apple, or any company gets in dealing with technology suppliers (like Imagination, Qualcomm, Intel, AMD, and Khronos) is those suppliers respond to the needs of several customers, markets, and applications. In doing so, they learn of various requirements, spread the costs, drive innovation, and move the industry forward. Apple is a throwback to the old days when companies like IBM and Burroughs did everything. Those old big-iron companies did that because they had to. And having vertically integrated companies that did everything is what trapped the industry for so long in limited innovation proprietary systems. It was the emergence of the merchant supplier, the ODM, the common fabs, the fabless IP providers, and the open standards that propelled many industries (e.g., PC, mobile, as well as TV) forward. Why then, would Apple turn away from leveraging the innovation of industry-leading technology providers?? To save a few pennies on GPU IP? Are its margins that threatened by the competition, that it can rationalize hiring dozens of GPU engineers to save pennies per phone by dumping Imagination, or stone-walling Qualcomm on royalty payments?
 
By making demands on its suppliers Apple forces them to invest a lot of resources in meeting Apple’s requirements. That’s normal, and how things should work—listen to the customer, give him what he wants to buy. Apple however, uses the technology, then squeezes the suppliers to make it cheaper, and then at a certain point say it’s not cheap enough, and go make it themselves—having learned over time from the suppliers how to make it. Apple has been hiring GPU architects and designers for years now, and several from Imagination. Again, not illegal, and maybe not unique, but how badly do you want a customer like that?
 
When small suppliers lose a big customer like Apple, they usually can’t find another large customer to replace the lost business and as a result struggle to remain solvent, get bought cheaply, or are forced to diversify. Another “be careful what you wish for”—love to get an order from a big fish like Apple, and enjoy it until it eats you.
 
And so now, mortally wounded, Imagination is seeking a buyer after losing almost 70% of its market value. And even though that announcement raised its share price 15.3% to 165.75 pence in London, the stock has dropped 38.1% since April 3, after the Apple pull-out announcement.
Who would buy Imagination? Well the company says it has attracted curiosity from a number of parties interested in buying the company. But what if one of them were Apple? It would be an incredibly cynical play on Apple's part, to knock down the price of Imagination and then go buy it. Apple, which (now) owns a 9.5% stake (up from 8%) of Imagination, took that position to prevent a hostile takeover of one of its major suppliers. We do know that Apple discussed a purchase of Imagination previously, in early 2016, but the companies failed to reach agreement. More likely, if Apple does buy Imagination now, is that it is doing so in response to fears that the graphics supplier might fall into the hands of new owners with pockets deep enough to pursue Apple for infringing Imagination’s patents. Ironically, Apple is in a position to dictate who can and can’t buy Imagination. How’s that for the ultimate control—Apple is a control freak. Oh wait, we knew that, didn’t we?
 
Postscript:
Apple appears to be making an aggressive move to poach more staff from Imagination Technologies. The Telegraph recently reported that Apple has set up its own GPU design team in offices just a few miles from Imagination’s campus.
 
The Silicon Valley giant has planted its flag by renting a 22,500 square-foot office in St Albans, a stone’s throw from Imagination’s headquarters. It plans to use the office to develop its own graphics technology as it ditches Imagination, leading to fears that it will poach the British company’s most talented staff …
 
The Telegraph reports that Apple has already hired a number of Imagination employees over the past few months, including COO John Metcalfe, but it seems likely that others would be reluctant to move to either London or Cupertino. Basing operations on Imagination’s home turf would make it much easier to recruit further staff, removing the need for them to move home.
 
The new office in the centre of St Albans sits a few miles from Imagination’s base in the adjacent Hertfordshire village of Kings Langley.
 
Apple gave Imagination notice that it would be designing its own GPU chips in future, and that it expected to achieve this within two years, at which point it would cease license payments. Imagination responded by invoking the dispute-resolution clause in its contract, and claimed that Apple would not be able to design a graphic chip without using its patented technology.
 
The battle between the two companies intensified last week, Imagination saying that Apple had made ‘highly regrettable … unsubstantiated claims‘ that it no longer needed the chipmaker’s IP, and the Cupertino company calling those statements ‘misleading‘ and disputing the timeline of events.
 
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