Imagination Technologies:

Imagination Technologies Group plc (LSE: IMG, “Imagination”, “the Group”) a leading multimedia, processor and communications technology company, has been notified by Apple Inc. (“Apple”), its largest customer, that Apple is of a view that it will no longer use the Group’s intellectual property in its new products in 15 months to two years time, and as such will not be eligible for royalty payments under the current license and royalty agreement.

That is a major blow to the company. Their stock dropped about 60% on the news, shaving hundreds of millions off the market value in just one day.

But Imagination will not go quietly:

Apple has used Imagination’s technology and intellectual property for many years. It has formed the basis of Graphics Processor Units (“GPUs”) in Apple’s phones, tablets, iPods, TVs and watches. Apple has asserted that it has been working on a separate, independent graphics design in order to control its products and will be reducing its future reliance on Imagination’s technology.

Apple has not presented any evidence to substantiate its assertion that it will no longer require Imagination’s technology, without violating Imagination’s patents, intellectual property and confidential information. This evidence has been requested by Imagination but Apple has declined to provide it.

Seems clear that Apple is going its own way, that this is more of a license fee negotiation to avoid a complex and costly lawsuit. Though a custom GPU is no trivial task, Apple owns enough chip design experience and can hire any additional GPU-specific expertise they need to make this work.

Note that Apple owns 8% of Imagination and was reportedly in talks to buy the entire company in March 2016 but the talks are said to have ended without an offer. This does smell a bit like a hardball negotiating tactic, with Imagination going public they way they did. Apple’s long advance notification could be the first step in the dance to lower royalties.

Legal issues aside, if Apple and Imagination do part ways, this seems a positive move for Apple, a chance to control even more of the stack, reduce their fabrication costs, and add more graphics power across the product line.