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Apple Fires Back at Supplier Imagination in Contract Dispute

July 7, 2017
Apple’s accusations escalate a dispute with a supplier that has relied on its business for about 50% of its revenue.

When the iPhone supplier Imagination Technologies Group Plc announced in April that Apple Inc. would no longer be using its graphics technology, investors in the small U.K. company were shocked. The graphics provider’s stock collapsed more than 60%.

But while investors were caught off guard by the move, Apple said Imagination had known for nearly two years that it was winding down the relationship.

Apple first informed Imagination in late 2015 that it would no longer be buying the U.K. company’s latest technology, Apple said in an emailed statement to Bloomberg. It would still use its older systems.

By 2016, Apple said it told Imagination it was further diminishing the relationship by initiating a clause in its contact that allows Apple to pay a lower royalty rate for using a smaller amount of intellectual property. By February of this year, Apple said it told Imagination it was ending the relationship altogether and would no longer be making any royalty payments as early as 2018.

Apple’s statement clashes with Imagination’s time line of events. On a conference call with investors this week, Imagination CEO Andrew Heath said the company was informed by Apple at the end of March "that they were certain" that products to be released in 2018 or early 2019 will no longer use Imagination’s intellectual property.

Apple said Imagination had known for longer that the relationship was ending.

“We began working with Imagination in 2007 and stopped accepting new IP from them in 2015," Apple said. "After lengthy discussions we advised them on February 9 that we expected to wind down our licensing agreement since we need unique and differentiating IP for our products. We valued our past relationship and wanted to give them as much notice as possible to adapt their future plans."

Imagination didn’t have an immediate comment. Its shares fell as much as 8% in London trading.

Apple’s accusations escalate a dispute with a supplier that has relied on its business for about 50% of its revenue. The two companies have worked together since the first iPhone was released in 2007, but now Apple is developing new graphics technology by itself. The chips have primarily been used for displaying graphics in games and other apps, but are now increasingly powering new artificial intelligence and augmented reality features.

Imagination has questioned whether Apple can develop new graphics technology without using its intellectual property. Heath said on the investor call that "we don’t accept Apple’s position" that it can build its own system. He called Apple’s decision to stop making royalty payments "unsubstantiated."

Responding to the allegations, Apple said it’s been using less and less of Imagination’s technology in recent years and that the supplier would have no way of knowing how its future products are designed. "We’re disappointed in their response, which has been inaccurate and misleading,” Apple said.

Apple’s decision to drop Imagination is devastating to Imagination’s business. Imagination’s shares are down 41% since March 31, the last business day before the it revealed the dispute with Apple. The U.K. company recently announced that it’s now attempting to sell the business. Apple isn’t likely to make an offer, according to a person familiar with the matter.

By Adam Satariano

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Licensed content from Bloomberg, copyright 2016.

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