Apple to slash royalty payments to GPU designer Imagination by two-thirds

As Apple is winding down its supply deal with UK-based GPU designer Imagination Technologies over the next two years, a new report alleges that the Cupertino firm is about to slash payments to Imagination to just one-third of its current royalty rate.

Reuters cited UBS analysts as predicting that Imagination could very easily become a loss-making company by fiscal 2019 without any Apple royalty contributions. The British GPU designer may even have to axe jobs and consider other potential cost-cutting moves in order to weather the storm ahead.

Imagination is currently in talks with Apple on a new shorter-term licensing deal.

UBS analysts caution that the iPhone maker is likely to ratchet down the royalty rate it currently pays to Imagination of around $0.30 to closer to $0.10 per iPhone unit. This is about the same what Imagination typically charges customers like MediaTek.

Imagination is among suppliers that depend on Apple for more than half of their revenues.

Such a drastic royalty rate reduction is a huge blow to Imagination—especially given Apple is Imagination’s biggest customer accounting for more than half of its licensing revenues.

Chart via Statista.

Imagination recently said Apple would stop using its GPU blueprints within 15 to 24 months.

The development caused Imagination’s stock to lose nearly two thirds of its value in a single day. Analysts are now unsure if the company can survive the fallout with Apple. The Cupertino firm informed Imagination that it’s been working on a separate, independent graphics design.

Apple’s explanation for severing ties with Imagination in the next two years: it wants to reduce its future reliance on Imagination’s technology. The UK firm reported revenue of more than £120 million (or approximately $150 million) in the year leading up to April 2016.

Tim Cook & Co. are not ditching Imagination to save money.

Licensing cost related to Imagination’s PowerVR GPU blueprints used in Apple’s A-series chips is less than $100 million annually, so there’s that.

Apple was probably unhappy with Imagination’s roadmap and its tile-based deferred rendering technique so it decided to build its own radically new GPU technology from scratch.

An Apple-designed GPU could incorporate modern features for photorealistic images, such as ray tracing rendering with real-time shadows, reflections and other effects. Imagination threatened to sue Apple if it proceeds with the development of in-house GPUs.

Source: Reuters