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Apple/Imagination licensing deal could boost iPad, Apple Watch performance

Apple Inc.'s new licensing deal with Imagination Technologies Group PLC could see the British chipmaker's components make it into iPads, the Apple Watch and a rumored augmented reality headset, according to analysts.

More than two years after Apple said it would introduce its own graphics chips and stop using Imagination's IP in its new products, Imagination inked a new multiyear license agreement with Apple giving the iPhone-maker "a wider range" of access to its intellectual property. Details of the deal, including its length and the IP it includes, were not disclosed.

"With this deal, Apple has acknowledged the superiority of Imagination’s GPU tech," said Sravan Kundojjala, a mobile processor expert at research firm Strategy Analytics. He expects Apple to absorb the company’s IP and talent as it previously did with fellow United Kingdom-based chipmaker Dialog Semiconductor PLC. Apple operates an office close to Imagination's headquarters in the U.K. and currently has 18 open job posts at the location, many of which are graphics related.

According to analysts, the agreement suggests Apple realized it cannot create graphics processors in-house that match Imagination's chips to meet its launch deadlines for various devices. Having recently settled a protracted litigation battle with leading chipmaker QUALCOMM Inc., Apple also likely did not want to infringe on Imagination's IP.

In December, Imagination announced a new graphics processing unit, or GPU, described as its "fastest-ever" GPU IP for mobile, boasting 2.5 times the performance, eight times faster machine learning processing and 60% lower power than its rivals.

"This agreement signals that Apple needs Imagination's cutting-edge tech," said Apple expert Marta Pinto from analysis firm IDC. According to Imagination, the new GPU works across multiple devices, has a smaller silicon size and consumes less power than the competition, making it an ideal fit for a future 5G Apple Watch, Pinto said. 5G is set to offer download speeds many times faster than the current 4G LTE wireless networks.

Pinto said Apple will be looking to improve the battery life on its next smartwatch as it offers even more health-oriented features — such as sleep tracking — that will require the device to stay awake for longer.

Apple could also add the chips to a souped-up iPad Pro, the biggest and most powerful of Apple's tablets, in a bid to market it as a gaming powerhouse, Pinto said. That strategy would fit into Apple's pivot to services as it looks to combat a mature smartphone market with subscriptions to gaming, news, music and video streaming platforms. Apple may be seeking a GPU for a long-rumored augmented reality headset as well.

SNL ImageApple's new gaming service Apple Arcade
Source: Apple

Imagination declined to comment on the agreement. Apple did not immediately respond to a request for comment.

Apple severed ties with Imagination in 2017 and began making processors internally, starting with the iPhone X. It is now on to the third generation of its Bionic chipset and also uses its own chips in the Apple Watch and iPad Pro. Imagination's stock plummeted after it lost its biggest customer, and it was sold to a private equity firm just months later.

In 2019, Apple acquired Intel Corp.'s modem unit. The move was widely believed to be tied to a 5G iPhone, expected in the fall. Both Pinto and Kundojjala believe it is too late in that device's production cycle for it to utilize Imagination's new GPUs. Those GPUs are not expected to be commercially available until 12 to 18 months after their launch this year, according to Kundojjala.

Nevertheless, the new agreement with Apple is huge for Imagination, as it reinforces the company's decision to invest in research and development after a period of immense disruption, Kundojjala said. In line with industry standards, he expects Imagination to generate upwards of $25 million to $30 million in royalty payments from Apple in 2021 if its GPU makes it into 100 million Apple devices. In 2016, Imagination revealed that it receives a royalty of 25 cents to 30 cents per unit from Apple products. That figure will likely increase given the complexity of current-generation GPUs, Kundojjala said.

"If down the line Imagination's GPUs make it into iPhones, that would be an even bigger win," Kundojjala said.