[Apple Shockwave]③ 'Leaving Apple?' Tears of a Once-Thriving Semiconductor Company

Jobs Ordered Discontinuation of 'Newton', Planted the Seed for ARM-Based Apple Silicon
PortalPlayer Provided SoC for iPod but Was Eventually Phased Out
Apple Began Designing Its Own Semiconductors While Developing the iPhone

Editor's Note[Apple Shockwave] is a content series that examines the upheaval caused by Apple entering the semiconductor market. You might wonder why Apple is involved in semiconductors. Apple is no longer just a company that makes smartphones and computers. After long efforts starting from its founder, the late Steve Jobs, Apple has designed world-class semiconductors used in mobile devices. If Intel was the key player in the PC era, Apple has become the top predator in the semiconductor ecosystem of the mobile era. Amid the global semiconductor supply chain crisis and large-scale investments in semiconductor production facilities, we will carefully examine the upheaval and prospects in the semiconductor market brought about by Apple Silicon to broaden our readers' insights. Apple Shockwave will visit readers every Saturday. After more than 40 installments, it will be published as a book.

In 1998, Steve Jobs, then CEO of Apple, ordered the discontinuation of the development of 'Newton,' a mobile device (PDA). Newton is still remembered as Apple's first mobile device. At that time, Jobs was performing a major overhaul of Apple's product lines, which numbered in the dozens, to save the company from crisis. Moreover, Newton was developed under the leadership of John Sculley, the former CEO who had fired Jobs. It was natural that Newton, which did not sell well, fell out of favor with Jobs.

At that time, Apple laid off developers of discontinued products instead of transferring them to other departments. However, the Newton team was an exception. Perhaps Jobs anticipated the coming era of mobile devices. Although Newton disappeared with regrets, promising a future, it left a historic legacy: the semiconductor design company ARM. This was when the company that created low-power semiconductor designs used in smartphones and tablets was born.

Newton, which disappeared into history by Steve Jobs. Newton was the first Apple product to use a chip designed by ARM.

Two years after Jobs returned to Apple, in 1999, the ambitious iMac he introduced saved Apple from crisis, but that alone was not enough. A bigger innovation was needed. At that time, the MP3 music file sharing service 'Napster' was gaining popularity. The enthusiasm for MP3 players, which started in Korea, also began to flare up.

Apple watched the rise of MP3. Apple judged that it could not compete with players based on NAND flash memory led by Korean companies. Instead, it focused on Toshiba's 1.8-inch ultra-small hard disk, which was affordable. Apple wanted a player that could replace the jukebox. Apple adopted the concept of 'a thousand songs in your pocket' and began developing the MP3 player iPod, capable of storing thousands of songs. With the storage device decided, the next step was the semiconductor to process the audio.

Apple had used semiconductors from different companies for Apple II, Macintosh, and PowerBook, but was dissatisfied. Although it developed the 'PowerPC' CPU with IBM and Motorola to beat Intel, it still could not surpass Intel. In this situation, chip selection for mobile devices was more important than ever.

Apple's MP3 player iPod achieved great success by using semiconductors from PortalPlayer based on ARM architecture, providing Apple with a foundation for entering the mobile market.

Apple tested products from well-known semiconductor companies such as STMicroelectronics, Texas Instruments (TI), and Cirrus Logic. Their chips did not satisfy Jobs. While still pondering, a newly established fabless semiconductor company called 'PortalPlayer' entered Apple's radar. PortalPlayer designed a system-on-chip (SoC) based on ARM's architecture. Using the semiconductor designed by PortalPlayer resulted in noticeably better sound quality compared to chips from other companies. An Apple employee told PortalPlayer that they were going to make an MP3 player and that within ten years Apple would transform into a music-related company, inviting them to join the journey. It was natural that PortalPlayer, a company in its first year, was excited. Thus, PortalPlayer became the core semiconductor supplier for Apple's first mobile device led by Jobs. Thanks to ARM, Apple and PortalPlayer significantly shortened semiconductor development time, accelerating iPod development.

PortalPlayer dedicated itself to Apple's grand plan to dominate the music market. The iPod (classic version using a hard disk), released in 2001, was a huge hit. The iPod turned the MP3 player market into 'Apple's playground.' MP3 players other than the iPod gradually disappeared. The iPod was Apple's first successful mobile device. It is no exaggeration to say that Apple's status, led by the iPhone and iPad, began with the iPod. The iPod was also a signal of ARM's rise and the beginning of the era of low-power semiconductors for mobile use.

Logo of PortalPlayer. This company disappeared after being acquired by Nvidia following its split with Apple.

Abandoning Sole Supplier PortalPlayer... The Alternative: Samsung

As iPod sales increased, PortalPlayer's performance soared as the sole semiconductor supplier. The world focused on the 'heart' of the iPod. Venture capitalists lined up to invest in PortalPlayer. Apple relied entirely on PortalPlayer. Ninety percent of PortalPlayer's sales came from Apple.

Riding the iPod's halo, PortalPlayer went public on NASDAQ in 2004. It was not surprising that investments poured into a company supplying semiconductors to Apple. The initial target offering price was $11?13 per share but soon rose to $14?16. The final offering price after demand forecasting was $17. This was just the beginning. On the first day of the IPO, the stock price surged 62% intraday to $27. The closing price was $25.8, a 52% increase over the offering price. The IPO was a huge success. Everything seemed rosy. Market research firm IDC predicted that iPod sales would increase by 57% between 2003 and 2008, benefiting PortalPlayer. At that time, PortalPlayer included a warning in its IPO documents that Apple might switch to self-developed or other companies' chips. No one paid attention then. There was barely time to pop the champagne.

What does PortalPlayer look like in 2023? Would it have become a great semiconductor company making even better chips by now? The reality was different. PortalPlayer disappeared after being acquired at a bargain price by NVIDIA, which now designs chips for graphics and AI, in 2006.

PortalPlayer, dreaming of 'leaving Apple,' wanted to break free from being just a chip supplier for iPods and clashed with Apple. Apple made a decision. For PortalPlayer, which depended on Apple for 90% of its sales, it was tantamount to a death sentence. Apple had a trusted alternative: Samsung.

Apple used chips made by Samsung Electronics instead of PortalPlayer's chips starting with the second generation of the 'iPod Nano.' It was only after the release of iPod Nano 2 that Samsung's chips were revealed to be used.

Apple iPod Nano 2nd Generation, the first to use the SoC chip supplied by Samsung

After PortalPlayer's downfall, Samsung's semiconductor business took off through Apple. Samsung supplied memory and audio processing semiconductors to Apple, securing leadership in the NAND flash memory market and laying the groundwork for significant achievements in its nascent foundry business.

Some analysts believe that the seeds of conflict between Apple and Samsung were sown at this time. Samsung was also producing the MP3 player 'Yepp.' From Samsung's MP3 player division's perspective, there was dissatisfaction that Samsung supplied NAND flash to Apple at lower prices, but it overlooked that Samsung could use the chips supplied to Apple in its own MP3 players. Contrary to concerns, Samsung used NVIDIA-designed 'Tegra' chips in MP3 players competing with the iPod Nano. Tegra was based on technology from PortalPlayer, which NVIDIA had acquired. Tegra was NVIDIA's ace card to enter the mobile device market but ended up a market failure. Both Tegra and Samsung's MP3 players disappeared into history.

The iPod became the foundation for Apple to move beyond PCs into the larger mobile arena. Amid the iPod's success, Apple quietly began developing the iPhone. Through the iPod, Apple reaffirmed the importance of semiconductors in mobile devices. Although it initially collaborated with specialized companies due to a lack of semiconductor design capability, it soon realized the necessity of in-house development. The sacrifices of Newton and PortalPlayer were the starting points of Apple Silicon. And a plan to shorten the time for in-house semiconductor development was devised. The answer was mergers and acquisitions. Thus, Apple's own mobile chip A-series was preparing to enter the world.