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In Industry Shift, Apple Prepares to Buy Chips From Intel

Posted on: Tuesday, 7 June 2005, 12:00 CDT

Steve Jobs is preparing to take an unprecedented gamble by abandoning Apple Computer's 14-year commitment to chips developed by IBM and Motorola in favor of Intel processors for his Macintosh computers, according to industry executives who have been informed of the decision.

The move is a chesslike gambit in a broader industry turf war that pits the traditional personal computer industry against an emerging world of consumer electronics focused on the digital home. The plans were revealed by the industry sources on Sunday.

"This is a seismic shift in the world of personal computing and consumer electronics," said Richard Doherty, president of Envisioneering Group, a Seaford, New York, computer and consumer electronics industry consulting firm. "It is bound to rock the industry, but it will also be a phenomenal engineering challenge for Apple."

Jobs was expected to announce the transition to Intel chips at Apple's annual developer conference, which began here Monday.

Apple's intention to shift to Intel chips beginning in 2006 was reported on Friday by CNET News.com, a technology news service. The Wall Street Journal previously reported that Apple and International Business Machines were negotiating.

Apple, according to analysts, has become increasingly alarmed by IBM's failure to deliver a new version of its Power PC chip, called the G5, that does not generate much heat a crucial feature for notebook computers, which do not have as much room for fans and ventilation as desktop machines.

Apple's notebooks now use the older G4 chips made by Freescale Semiconductor, which was spun off from Motorola last year.

"That's a huge looming problem for Apple, if it can't keep up with Intel notebooks in performance," said Charles Wolf, an analyst for Needham. "And that's been an IBM problem. IBM hasn't delivered a cool-running G5."

Spokesmen for Apple, IBM and Intel all refused to comment on the possible shift in alliances.

The first move in the complex industry realignment now taking place was made more than a year ago when Microsoft broke with Intel and said it would use an IBM processor chip, similar to the one used by Apple for its Macintoshes, in the second version of its Xbox video game machine.

What Microsoft has made clear recently is that the new Xbox, to be called the 360, will be much more than a video game player when it reaches store shelves this autumn. It will perform a range of home entertainment functions, like connecting to the Internet, playing DVD movies and displaying high-definition television shows as well as serving as a wireless data hub for the home.

Microsoft's decision to build its own computer hardware, with help from IBM, was a direct assault on a market that Intel was counting on for future growth. It is likely that Intel forged the alliance with Apple in an effort to counter the powerful home entertainment and game systems coming from Microsoft and Sony. While the new partnership is a clear and long-sought victory for Intel, the world's largest chip maker, it portends a potentially troublesome shift for Apple, the iconoclastic maker of personal computers and consumer electronic gadgets.

Apple was the largest maker of personal computers in the early and mid-1980s, but its share of the worldwide computer market fell steadily over the past two decades as the Windows-Intel alliance emerged as an overwhelming personal computing standard.

That decline came despite Apple's earlier shift from Motorola microprocessor chips to the PowerPC processor, the fruit of an alliance that Apple entered into in 1991 with Motorola and IBM. Originally intended to counter Microsoft and Intel, the alliance was never able to stop the erosion of Apple's market share, as Apple customers were forced to upgrade their hardware and software to take advantage of the newer processor chip.

For IBM, the end of the Apple partnership means the loss of a prestigious customer but not one that is any longer very important to IBM's sales or profit. It further underlines how much IBM's strategy in recent years has moved away from the personal computer industry that it helped create. Last month, IBM completed the sale of its personal computer business to Lenovo of China.

The chips that IBM makes for Apple represent less than 2 percent of chip production at its largest factory, in East Fishkill, New York. For years, according to industry analysts, the work for Apple has been barely a break-even business for IBM. For IBM, "the economics just didn't work," said one industry executive who was briefed on the negotiations. "And Apple is not so important a customer that you would take the financial hit to hold onto the relationship."

Source: International Herald Tribune

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