Why Apple did it, and what’s in the future for PortalPlayer?

Apple dumps PortalPlayer, picks up Samsung

Portal Who?

A little over two weeks ago, Apple announced that it will be parting ways with long time chip supplier PortalPlayer. PortalPlayer has been at the heart of Apple’s ubiquitous digital media players since the very beginning, starting with their PP5002B chip, (a multi-processor, ARM-based chip) in 2001. According to industry estimates 90% of Portal Player’s revenues come from their iPod chip. The company’s stock plummeted after the news, shedding 42% of its value, or about $220 million in assets. Why did Apple do it? And what is PortalPlayer doing about it?

But Why Apple? Why?

Reasons for the sudden switch are unclear, since Apple does not discuss their future offerings or business decisions. Considering the secrecy that surrounds Apple’s product launches, we won’t really know until they (or Think Secret or Apple Insider or…) tell us, but all signs point to a refreshing of the current generation of the iPod line, meaning that PortalPlayer will be left supplying chips for products that will soon be obsolete. However, if the posthumous success of the iPod Mini is any sign, this may not be as bad as it sounds. Some industry analysts think that PortalPlayer’s new chip, the SoC PP5024, built on a 130-nm design and aimed at the new iPod nanos due later in the year was doing too much and was consequently too expensive for PortalPlayer to price aggressively to Apple for use in the price-competitive-market of digital media players. However it makes me wonder, since when do people buy the iPod for its value, or even functionality? Most people buy it because of its ease-of-use and iconic status. Just one look at other players in the market shows us that the iPod is one of the least competitively priced, and offers the least amount of added functionality.

Who’s Singing?

Guess who’s singing all the way to the bank. Apple has decided to go ahead with chips from Samsung for their future MP3 players. While touting Samsung’s new 32-bit ARM-based chip as the “PortalPlayer killer”, Jon Kang, senior vice president for technical marketing group at Samsung said that he knew they would win the design, and that PortalPlayer would take a dive. I think that its important to note that Samsung also provides the NAND flash memory chips for Apple, which were similarly very competitively priced. So competitively priced that they got the attention of South Korea’s Fair Trade Commission.

What Now for PortalPlayer?

While Apple and Samsung smoke their cigars and reap the millions, what becomes of PortalPlayer? According to chief Johnson, PortalPlayer is hard at work trying to “win back that business” with its new chip which he said can do “full high-end video playback”. However, at the same time PortalPlayer has set on a course of proving that they aren’t just an iPod chip maker. The biggest rabbit that the company has in its hat, if a rabbit at all, is the chip they are producing for Microsoft. It makes sense, PortalPlayer gets dumped by Apple and gets hitched to Microsoft. The chip in question is going to power auxiliary displays, or ‘personal media displays’ that will be supported on Vista-enabled computers. These displays can display new mail, play music, show your address book, weather, stocks, and other information that you may need quick access to, without having to open your notebook. What does this mean for PortalPlayer though? Well, if we can take chief Johnson’s word, 65 million notebooks will ship in 2006, and up to 104 million by 2008. If PortalPlayer is successful, this could initially account for 10% of their revenue, and eventually even reaching the level revenue from iPod sales. Experts believe that the company got on the iPod bandwagon at just the right time, and it is doing the same by getting on this bandwagon now. PortalPlayer has been working with Apple for 5 generations of iPods, and perhaps its time it moved on (not that it can do otherwise).

Conversely the lost of 95% of its revenue stream and the fact that it is trading at 40% below its price from 2 weeks ago, makes PortalPlayer an ideal takeover target.

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