It is called firmware because it's not software (i.e., the programs that users run on the computer), but it's also not hardware (the physical objects that make up the computer).
On the iPhone, firmware is the set of operations and tools that sit between the hardware that the phone uses and software that runs on the phone. It enables features, fixes bugs, and attends to the functioning of the phone.
Periodically, Apple releases firmware updates to add new functionality to the iPhone, correct problems with it, and close security holes.
Link for iPhone: here
Link for iPad: here
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