Why Apple still needs Motorola

Tuesday, 2003-10-07; 18:39:00

Does Apple stand to benefit from Motorola's semiconductor spinoff?

(Originally posted on AppleXnet)

Earlier this week, Motorola announced that it would finally be spinning off it's Semiconductor Products Segment (SPS) into a separate company from Motorola. SPS manufactures Motorola's PowerPC G4 processor, as well as the embedded processors that power its mobile phones. We all know how slow Motorola has been in churning out new versions of the chip that is used in so many of Apple's products, particularly back when the G4 was stuck at 500 MHz for nearly a year and a half. So what does this mean for Apple?

Despite the fact that Motorola is spining off SPS, Motorola will still probably be a major stockholder in the new publicly traded company, so Motorola itself will most likely hold a lot of clout in determining where the company goes. Nevertheless, this news can only mean good things for Apple. As a publicly traded, separate entity, the new company can focus on the only thing it's going to do: make chips. Motorola, on the other hand, can keep on creating products like mobile phones that use the chips that SPS produces. This means that it is in the new company's best interest to pursue other markets which could potentially use its processors, since that's all the company is going to be doing.

There's always been talk of Apple outright buying the rights to the PowerPC semiconductor unit, so it can truly be a company that makes "the whole widget" -- including the processors. This is unlikely to happen, however: Motorola's SPS unit chip sales alone are $5 billion, while Apple only has about $4.5 billion in the bank. So it's unlikely that Apple would even be able to pull off such a venture. Not that it would be a good idea, anyway. While Apple is a veteran at product design and software publishing, it's track record in the semiconductor business is, well, zero. So it's probably better off leaving it to IBM or Motorola.

It remains to be seen whether the SPS unit will be able to revitalize itself and return to profitability: SPS contributed $246 million dollors in losses to Motorola in the first half of 2003, and was even worse in earlier years. Hopefully, not being overseen by a large company who's concentrated on embedded products will allow it to refocus more of its business on supplying chips for the use in personal computers. And indeed, Apple still needs this company for at least a while to come, given that Motorola makes the G4 that is currently powering the eMac, iMac, and PowerBook lines of its product matrix. Whether or not Motorola's reluctance to improve it's G4 processors led to the delay of the much-anticipated 15" aluminum PowerBook, Apple is likely working with IBM to produce mobile versions of the G5 processor. But the time that Apple is able to use a mobile G5 in its PowerBooks is still a ways off.

However, it would be to Apple's benefit if it can get renewed support from Motorola's semiconductor spinoff. While it may not be immediately interested in chip development, Apple could at least enlist the new company's help in producing processors it develops with IBM. Witness the debacle with the PowerMac G5s: the dual 2 GHz machines have only just started reaching regular customers, and it's 2.5 months past the date of first shipment of the G5 PowerMacs. If Apple had had Motorola to help produce the chips rather than relying on IBM alone, many of these computers would be in the hands of Apple's customers much faster, and Apple wouldn't have had to push the ship dates back multiple times for some customers' orders.

More importantly, however, is in the future. IBM and Apple seem to be tightly knit right now, but that could change in the future. If IBM's sales of its blade servers start dropping off, Apple will be the sole customer of IBM's PowerPC 970 chips. That would mean that the return on IBM's investment in the creation of that processor may be negligible, and IBM could be in the same position as Motorola is in now: focusing its chipmaking business on markets other than personal computers. And if that happens, where does that leave Apple?

At that point, if it ever comes, Apple would be in a really tight spot, and the migration to Intel or AMD processors would be rockier than the transition to Mac OS X. It's doubtful as to whether Apple would even be able to survive such a transition, mainly because all existing Mac software would become unusable. Motorola could turn out to be Apple's saving grace in a situation like that, as horrific as that sounds right now.

This all assumes, of course, that Motorola's spinoff will still be in the chipmaking business in the future. The point is, Apple can't rely on a single company to supply its processors, since it currently commands such a small portion of the personal computer market. Apple is susceptible to relatively small market fluctuations that dictate whether a chipmaking company is profitable or not. And that's a dangerous path to tread.

If Apple could secure another AIM (Apple, IBM, Motorola) alliance like it did back before the G3 processor was produced, it would be in a much more comfortable position.

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