Every girl crazy about a sharp dressed...computer chip

Long ago, all men’s suits were handmade by tailors. Then mass production made off-the-rack garments more affordable, and now only the wealthy or fastidious buy fully tailored suits. A similar trend has transformed the semiconductor industry, making custom microprocessors a luxury only for well-heeled companies.

Crucial difference: Whereas custom suits are one-off designs, custom chips must be produced in large volumes to justify the high design costs and manufacturing-startup expenses. Apple’s A6 application processor in the iPhone 5 is a good example.

The A6 is no larger than a postage stamp, but it probably cost more than $500 million to get the first chip out the door. Yep, that’s half a billion dollars for a processor that beats a competing design from Samsung by about three months and will be obsolete in about two years. Yet, for Apple, it may be a good investment.

Here’s the breakdown. In 2008, to acquire more engineering expertise, Apple paid $278 million for PA Semi, a Silicon Valley startup. Apple didn’t want the company’s processors—just its design experience. Next, in 2010, Apple spent $120 million for Intrinsity, a startup specializing in high-speed circuit design.

Then, to design the ARM-compatible A6, Apple needed an architectural license from ARM, the British company that owns the architecture. The license probably cost at least $10 million. Finally, Apple had to design the chip, verify it, and pay for the mask sets and other fabrication-startup costs. That’s another $100 million or so.

Total: about $508 million. And that’s just for a few test chips. Apple outsources production to an independent foundry, incurring more expenses for the finished chips and for royalties to ARM.

Apple has the resources and sales to justify a custom-tailored processor. Most companies must be satisfied with off-the-rack chips—even if their fit isn’t quite perfect.