Apple Buys Chip Designer

Late Tuesday, in response to questions from Forbes.com, an Apple spokesman said Apple has agreed to buy a boutique microprocessor design company called P.A. Semi. The company, which is known for its design of sophisticated, low-power chips, could spell a new future for Apple’s flagship iPhone, and possibly iPod products as well.



The 150-person chip company, P.A. Semi, was founded in 2003 by Dan Dobberpuhl, who was a lead designer for the well-regarded Alpha and StrongARM microprocessors developed by Digital Equipment in the 1990s.



“Apple buys smaller technology companies from time to time, and we generally do not comment on our purposes and plans,” said Apple spokesman Steve Dowling. He declined to comment on the value of the deal, which a person familiar with the deal suggested was done for $278 million in cash. Apple is due to announce its quarterly earnings Wednesday.

The decision to center the iPhone design around a chip that Apple could own marks a significant strategic choice by Apple Chief Executive Steve Jobs Steve Jobs , and is aimed at ensuring Apple can continue to differentiate its flagship phone as a raft of competitors flood the market. According to a source affiliated with the chip company, Jobs and Senior Vice President Tony Fadell led the tiny group of executives who spearheaded the acquisition, which included negotiations that took place in Jobs’ home.

Apple’s choice is a blow for chip maker Intel , which has been trying to convince Cupertino, Calif.-based Apple to rely on Intel’s chips–particularly its latest low-power line up, called Atom.

Apple has been rightfully proud of the iPhone, and has predicted that it will sell 10 million of the devices by the end of 2008. But that success has had a cost, too: Virtually every mobile-phone maker is scrambling to develop an iPhone-like device. Jobs has long asserted that Apple’s greatest strengths lay in its software and in its ability to integrate hardware and software. The result: Machines that combine appealing design with an intuitive user interface, such as the iPhone. But interfaces–as Jobs well knows–can be mirrored, if not copied.

Few in the high-tech world are as wary as Jobs of turning control of core components over to a partner. The PC industry has been his proving ground; over the past three decades, he has watched numerous PC makers that have built their products around Intel’s microprocessors wind up in fierce battles for narrower and narrower profit margins.

Led by Intel Chief Executive Paul Otellini Paul Otellini , Intel is developing a line of chips that it believes can become as central to handheld computing devices as its “x86″ chips have been to the personal computer industry. Intel has said it aims to create somewhat different lines of Atom processors tailored to different classes of applications, such as consumer devices, low-cost notebook computers and set-top boxes. The first of these designs is slated to begin shipping by the middle of this year; another by year’s end.

But that doesn’t mean Intel wants to create a unique chip for every customer–even for a charismatic customer like Apple.

Apple first got to know the designers at P.A. Semi about three years ago, when the computer maker still used PowerPC chips in its Macintosh computers. Dobberpuhl and his team, which includes engineers who had a hand in designing powerful chips, including Intel’s Itanium, Advanced Micro Devices‘ Operton and Sun Microsystems‘ UltraSparc. Dobberpuhl was also the lead designer on a DEC chip project called StrongARM, which was ultimately folded into Intel after DEC collapsed. Intel tried to use the design as the basis of chips for the smart-phone industry, but eventually sold that group to Marvell.

Dobberpuhl wanted to design an enormously powerful chip, based on the PowerPC architecture, that used little power. When Apple decided to quit using the PowerPC chip in favor of Intel microprocessors, the conversations with P.A. Semi petered out.

In February 2007, P.A. Semi debuted a 64-bit dual core microprocessor which the company asserted was 300% more efficient than any comparable chips. It consumes only 5 to 13 watts running at 2 gigahertz. Telecommunications, networking and wireless companies embraced P.A. Semi’s work.

Meanwhile, Apple found a collection of other chip partners to build the guts of its iPhone. One key: According to technology market research firm iSuppli, South Korean electronics giant Samsung supplies the iPhone’s applications processor. Like a number of companies cranking out processors for mobile phones, such as Texas Instruments , Samsung’s processor is based on a design licensed from Cambridge, U.K.-based ARM. Apple was among the three companies, also including Acorn Computers and VLSI Technology, that formed ARM in 1990.

Texas Instruments, Qualcomm and Broadcom are also fighting for share in the low-power applications processors for smart phones and mobile gizmos based on ARM designs, according to iSuppli analyst Tina Teng, with Texas Instruments leading the pack. These companies are building increasingly sophisticated processors, however, targeted at bigger and more powerful devices. “Companies like Qualcomm are trying to diversify themselves and move away from being a pure wireless company into these ultra mobile PCs, or ultra mobile Internet devices,” Teng says.

Trevor Yancey, vice president of technology at IC Insights of Scottsdale, Ariz., sees ARM-based designs giving Intel a tough fight as Intel tries to push beyond notebooks and into smaller and smaller devices. “That’s going to be a tough battle. If you look at the ARM core–where it has been and where it has come from–the ARM core is very well entrenched in those kinds of applications,” Yancey said. “I think the gap between the two is certainly closing, but ARM is still developing at a fast pace.”

Although no current Apple products use P.A. Semi chips, Apple executives kept a close eye on the work of the start-up. Talks of acquiring P.A. Semi began only in the past few weeks. Employees have been notified of the deal.

It will likely take at least a year before products incorporating P.A. Semi designs are ready. The company’s flagship chip is at the heart of heavy-duty computing systems, such as those sold by NEC‘s storage division. But the design philosophy–hefty processing power and frugal power use–are in concert with Apple’s directions. Although Apple plans to continue supporting P.A. Semi’s current customers, insiders suggest that Jobs plans to use future P.A. Semi chips exclusively within Apple products.

At that point, executives believe the company will have created a unique asset–a powerful microprocessor that sips power lightly and so can support just about any imaginable applications Apple’s software gurus can imagine.