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Apple Inc. Explains Why It's Dumping This Supplier

Back in April, graphics intellectual-property supplier Imagination Technologies (NASDAQOTH: IGNMF) disclosed to investors that its most important customer, Apple (NASDAQ: AAPL), intends to move away from using Imagination's graphics processors in favor of internally designed processors.

That move had major implications for Imagination, which derives roughly half of its overall revenue (and substantially more than half of its PowerVR graphics-related revenue) from Apple. Ultimately, this situation has led Imagination to put itself up for sale, despite its protestations that it "does not accept" Apple's claims.

Image source: Apple.

What's interesting is that Bloomberg recently received a statement from Apple regarding Imagination Technologies' claims about this whole ordeal, and in that statement the iDevice maker revealed why it's opting to go with its own graphics processor designs rather than stick with Imagination's.

"Unique and differentiating"

Apple told Bloomberg that it had "advised [Imagination Technologies] on Feb. 9 that we expected to wind down our licensing agreement since we need unique and differentiating [intellectual property] for our products."

I like to think that the communications team that put that statement together chose each word in this statement deliberately. So in that spirit, let's pay attention to the key words in the statement -- "unique" and "differentiating."

In wanting to have "unique" graphics technology, Apple is saying it wants to build graphics technologies and capabilities that no other company has access to. That's fair, but being "unique" isn't, by itself, always a good thing. Something can be "uniquely awful" and it would still fit the definition of "unique."

Combined with the word "differentiating," on the other hand, it's clear that Apple wants to build graphics technology that's industry-leading and, again, that only Apple has access to.

Why Imagination can't deliver this for Apple

Apple's current A-series processors use graphics processors from Imagination Technologies, a company whose entire business model is structured around building technologies and allowing third parties to license that technology for integration into systems on a chip.

Apple might be able to differentiate somewhat using Imagination's intellectual property. It might use more graphics cores than other licensees do in each chip design, or it can implement the basic Imagination architectures more deftly than other licensees can. But any chipmaker that's willing to pay up fundamentally has access to the same graphics hardware that Apple does.

It's clear from Apple's statement, then, that the iDevice maker is planning to deploy graphics processors with features, performance levels, and/or power efficiency levels that it doesn't think Imagination Technologies can deliver.

Moreover, Apple is also implicitly suggesting that its in-house graphics technology is superior, at least in Apple's view, to what's being cooked up at ARM Holdings, another major licensor of low-power graphics processors for mobile applications.

I suspect that we won't see Apple's first Imagination-free A-series processor arrive this year with the A11 Fusion chip, as Imagination Technologies said at a recent investor conference that it "fully expect[s] to receive royalties from [its] largest customer over [the] coming year." Instead, we'll probably see it happen with the A12 Fusion processor in the iPhone models that'll launch in the fall of 2018.

Though that chip will be a real bummer for Imagination Technologies, I can't wait to see what "unique and differentiating" graphics technology Apple has managed to cook up. If it's anything like the company's home-grown CPU cores, then it should be clearly industry-leading.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.