Breakingviews: Apple proves once again it can be cold-blooded with suppliers

Published Mon, Apr 3 20174:00 PM EDT

Breakingviews

Robert Cyran

Apple has imagined away the future of one of its suppliers of chip know-how. Imagination Technologies lost more than 60 percent of its market value – a hit of over 450 million pounds – after the iPhone maker said it would stop using the UK firm's technology in 15 months to two years' time. Imagination's intellectual property is used in graphics chips found in iPhones, iPads and Apple Watches. The loss hits Imagination in two ways. The damage to its business is obvious. In the year to last April, fees and royalties from Apple totaled 61 million pounds. That's about half the British company's sales from continuing operations. Moreover, there are "minimal" direct costs associated with this revenue, according to the company, meaning pre-tax profit, estimated to approach 30 million pounds in the year to April 2018, could flip into a similarly sized loss. More from Breakingviews: Market gain is profit drain for China phone makers In addition, there have been regular reports that Apple, which owns 8 percent of Imagination, might acquire the firm. The odds of this happening just lengthened considerably. In a sense, investors may have been pricing in Apple's involvement twice – and unless it's all posturing, both supports for the British firm's valuation have now collapsed. The $750 billion Apple is famously controlling. Graphics chips have become increasingly important for mobile devices. Their capabilities are a selling point for Apple's phones today and crucial to virtual-reality applications tomorrow, an area Chief Executive Tim Cook has dropped hints will be important for the company. Moreover, because graphics chips can process data so intensively, they can be deployed for machine learning, a technology that has captured Silicon Valley's, well, imagination. Apple also likes to design specialized components for itself. That's a risk Imagination and other relatively small firms run in having the industry giant as a dominant customer. Cook's outfit can also be cold-blooded with suppliers that don't measure up. In 2006, for example, PortalPlayer lost more than 40 percent of its value on news Apple wouldn't use its chips for the next iPod. Imagination is putting on a brave face. It says it would be "extremely challenging" for Apple to design graphics chips in-house without infringing upon its intellectual property. Investors, however, don't seem to share that vision. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

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Imagination's intellectual property is used in graphics chips found in iPhones, iPads and Apple Watches. The loss hits Imagination in two ways. The damage to its business is obvious. In the year to last April, fees and royalties from Apple totaled 61 million pounds. That's about half the British company's sales from continuing operations. Moreover, there are "minimal" direct costs associated with this revenue, according to the company, meaning pre-tax profit, estimated to approach 30 million pounds in the year to April 2018, could flip into a similarly sized loss.