Apple (NASDAQ:AAPL) has announced that it will stop using graphics technology from British firm Imagination Tech (NASDAQ:MIPS) in its iPhones, iPads and Apple Watches in the near future. The announcement came as terrible news for the firm. Apple was Imagination Tech’s biggest customer and accounted for about half its revenue.
Apple notified the company that it would be developing its own graphics chips and would no longer use their processing designs. The technology company has licensed its processing designs to Apple since the release of the iPod and makes money on small royalties for every graphics chip used in a device. The change is supposed to take effect in 15 months to two years time.
Shares in Imagination Tech crashed more than 70 percent after the news, plunging to their lowest level since 2009. Imagination’s shares traded at 105 pence at 0915 GMT, giving the company a market value of 298 million pounds ($372 million), about 463 million pounds less than on Friday. The company was valued at more than 2 billion pounds ($2.5 billion) in April 2012.
Apple currently holds an 8 percent stake in Imagination Tech. The British company was founded in 1985 and listed in 1994. Around half of its non-Apple revenue comes from a MIPS processing platform purchased in 2012 as an attempt to expand its product offerings. Mobileye and Chinese chipmaker Spreadtrum Communications are current customers for the MIPS technology.
The move by Apple could be a bargaining tactic to reduce royalties. Apple paid Imagination license fees and royalties totaling 60.7 million pounds for the year ending April 2016. Apple is expected to pay about 65 million pounds for this year.
Legal battles could lie ahead for the companies. Imagination Tech believes that Apple will be unable to develop its own graphics chips without violating Imagination’s patents, intellectual property and confidential information. Chief Executive Andrew Heath said, “It would be extremely challenging for Apple to design a brand new GPU (graphics processor unit) architecture from basics, that is, without infringing our IP rights and also infringing our confidential information.”
This is not the first time Apple has cut off a supplier. In recent years, the company has abruptly dropped Portal Player, Sigmatel, CSR and Wolfson as suppliers. Imagination said it would talk with Apple about alternative commercial arrangements.