(Bloomberg Gadfly) -- Apple Inc. is a black hole, a corporate object so massive that you may want to be careful about being caught in its gravitational field.
The world's most profitable maker of smartphones exercises vast power over the suppliers who make components for its mobile devices. By choosing their designs or chips, Apple mints their fortunes. When it cuts them off though, it can reduce them to rubble. Especially when the subject company hasn't thought of an escape plan.
On Monday, the small U.K.-based chip designer Imagination Technologies Group Plc reached the event horizon. It disclosed that Apple, its biggest customer, plans to wean itself off Imagination's graphics processor chip designs within two years and will create its own designs in-house.
Given that Apple accounted for half of its annual revenue of 120 million pounds ($150 million) in its last fiscal year, Imagination is reeling. The share price fell as much as 70 percent, since none of this was remotely expected by investors. Apart from one, of course: Apple itself owns about 8 percent of Imagination's stock.
Imagination says it is still in talks with Apple over a new royalty arrangement and that it suspects the California-based giant won't be able to make its own designs without infringing on the British company's intellectual property. There's a good chance this ends in court. Patent fights are common in the technology sector. But even if Imagination wins, it won't necessarily fix things. It certainly won't be easy finding new customers that promise equally stellar rewards.
The risks are acute in the lopsided smartphone market, where Apple and Samsung hoard most of the profit. To ensure their dominance, they both choose the best processors, chips and components to produce premium products that command higher prices. In contrast, companies such as Huawei Technologies Co Ltd or Oppo Electronics that churn out cheaper Android phones tend to just buy a pre-packaged group of components to keep costs down.
Before today, Imagination was enjoying life in the Apple-Samsung sphere. Re-tooling to make its graphics processor designs more appealing to the cheaper end of the smartphone market may be difficult. It would probably need price cuts, imperiling R&D, and bringing the danger of a death spiral to a company whose real asset is its engineering talent.
The reality is that relying so heavily on one customer is always a risk, and one that Imagination probably wishes it had better managed. While Apple dominates profit in smartphones, it only has about 11 percent market share. There are ways to avoid such dependency, namely by making products that appeal to a greater range of smartphone makers. Imagination's larger cousin, ARM Holdings Plc, which designs processor chips, has avoided the Apple trap by allowing its blueprints to be more customizable. That's made them the industry standard, which means its sources of revenues are diverse.
Others with strong links to Apple include German chipmaker Dialog Semiconductor Plc and U.S.-based Cirrus Logic Inc. The former relied on Apple for 69 percent of sales last year, according to Bloomberg data, and the latter 85 percent. Imagination shows how such close ties can sometimes end painfully.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.
To contact the author of this story: Leila Abboud in Paris at labboud@bloomberg.net.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.
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