In chapter 6 of Strategic Entrepreneurism we correctly predicted that Apple would use their acquisition of the chip maker PA Semi to create custom chips for their products, which is exactly what’s happening (snip below). Also, my co-author Wallace Wang predicted the capabilities of the iPad here.
From Chapter 6 Strategic Entrepreneurism
Sometimes another company’s products aren’t as attractive as the people or technology behind the company itself. Back in the 90’s, Apple had their own engineers involved in designing the microprocessor chips used in their products including the Macintosh computer and their personal digital assistant dubbed the Newton. By having their own engineers, Apple could optimize microprocessors for their products in a way that buying off-the-shelf parts could never do.
To save money and lower costs, Apple eventually decided to switch to microprocessors made by Intel, the largest chip manufacturer in the world. By taking advantage of Intel’s massive resources and economies of scale, Apple hoped to use Intel’s processors in all of their products to lower their own costs.
However, Apple soon realized that getting rid of their microprocessor engineers also made them more dependent on Intel while making it harder to optimize or custom design processors for their own products. Although Apple’s iPhone has proved to be a big hit, Apple reportedly had to make compromises in the iPhone’s microprocessors. These microprocessors weren’t what Apple really wanted or needed, but they managed to make the best of it anyway.
At this point, Apple decided they wanted their own capability to design microprocessors to customize them for their own products, which was something they couldn’t do by relying on outside vendors like Intel. Rather than hire new microprocessor engineers and spend time and money creating their own microprocessor engineering division, Apple chose the faster route of acquiring another company, called PA Semi, instead.
PA Semi sold microprocessors commonly used outside of the personal computer market. One of PA Semi’s biggest customers was the Department of Defense. When Apple acquired PA Semi, they didn’t do it to expand into the defense contracting business or the microprocessor design business. Apple acquired PA Semi solely for the engineers and technical expertise of the company.
Armed with PA Semi’s technical knowledge, Apple can now customize their own microprocessors again and optimize them for their own products including the iPhone. Instead of being at the mercy of outside microprocessor vendors like Intel, Apple can rely on themselves. Instead of selling products like the iPhone that contain parts that any competitor could purchase and duplicate, Apple can now create their own processors that nobody else can duplicate or even buy without Apple’s approval.
PA Semi won’t help Apple break into new markets, but it will help Apple maintain its technological edge against rivals for its existing markets, and that alone can make the acquisition of PA Semi pay off in the long run.
Read more at Jon Fisher’s Blog
