Apple is prone to occasional fits of vertical integration, and has never been terribly reluctant to run counter to the prevailing hardware winds, but this doesn't sound like some Jobsian act of contrarianism. The report indicates that it's the iPhone's unique power and performance demands that are driving this move, at least ostensibly:

Apple could use the internally developed chips to sharply reduce the power consumption of its hit iPhone and iPod touch devices, and possibly add graphics circuitry to help its hardware play realistic game software and high-definition videos, people familiar with its plans say.

Apple already works with Samsung, the manufacturer of the ARM-based processors used in the iPhone and iPod Touch, to design chips suited to their specific needs, and Apple is a large enough company that it doesn't have trouble coaxing tailor-made hardware out of its suppliers. But totally in-house chip design boasts the huge advantage of secrecy; removing Samsung from the equation ensures that any power-saving, graphics-boosting chip features Apple manages to conjure for their next iWhatever don't eventually find their way into units available to other industry giants like HTC or RIM.

So don't confuse Apple's latest move with an effort to spur innovation—from here, this looks like technology-hoarding, pure and simple; a bid to further insulate their mobile devices from competition by locking down their hardware as hard as they do their software. [WSJ]

The good news is that when Microsoft said that their red ring problems are fixed on newer units, they were probably right. They went to "an unnamed ASIC vendor based in the United States and redesigned the chip." Probably ATI, is what EETimes thinks. Moral of the story is to not skimp on chip design so you can save tens of millions, because that may come back and bite you in the ass down the road. [EETimes]