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23 April 2019

Lawsuits settled, Intel gone: Apple and Qualcomm locked into unhealthy co-dependency

Apple has unmatched control of its supply chain, and has been strengthening that control further by developing key iPhone components inhouse rather than relying on third parties – a strategy which has had serious consequences for former partners such as Imagination Technologies. But despite its disproportionate impact on the fortunes of the smartphone components sector, even Apple is not an island. When it comes to the smartphone modem, a challenging segment in which many firms have failed, Apple has been unable to find a viable 5G alternative to Qualcomm.

Intel out of smartphones again as its alliance with Apple fails:

Apple and Qualcomm dramatically called off their long and bitter legal battle on Tuesday, hours into a trial in San Diego, settling all outstanding actions. That was followed by a statement from Intel, which had hoped to be the sole modem supplier for the future 5G iPhone, saying it would exit the 5G smartphone modem business, though it would continue to develop the chips for other devices especially for the IoT.

Intel said in a statement: “Intel Corporation today announced its intention to exit the 5G smartphone modem business and complete an assessment of the opportunities for 4G and 5G modems in PCs, Internet of Things devices and other data-centric devices. Intel will also continue to invest in its 5G network infrastructure business.” It added that it has no plans to release any of the 5G modems, including those previously scheduled for 2020. It will meet existing customer obligations for the 4G product family, presumably including current iPhone models.

Intel may now decide to sell its communications business altogether, saying goodbye to the Infineon purchase along with other inhouse developments. Anshel Sag, an analyst with Moor Insights & Strategy, told ExtremeTech: “I believe that Intel is seriously considering selling the division or closing the division and selling IP to Apple.”

Analysts estimate Apple may have paid $6bn to settle:

Wall Street analysts estimated Apple may have paid as much as $6bn to settle a string of lawsuits, failing in its bid not only to reduce its royalty payments for Qualcomm patents (many paid through iPhone manufacturers, which were also included in some of the legal actions), but to undermine the chip giant’s whole controversial business mode. Apple was alleging many areas of anti-competitive behaviour, while Qualcomm countersued with accusations of patent infringement and breach of contract.

Now Apple has retreated, because put simply, it had no other option if it is to launch a 5G iPhone this year or early in 2020, which lives up to its high performance standards.

It had been relying on Intel to power that device, having introduced the supplier to many 4G iPhone models to reduce its reliance on Qualcomm. But there have been reports of problems with the Intel 5G chip, and Apple was even said to be talking to Huawei as a potential alternative (a partnership which could have caused all kinds of issues, given the current state of US-China trade relations).

Details of the settlement were sparse, though Qualcomm says it will reveal more on its quarterly results call on May 1. What is officially known is that Apple will pay Qualcomm an undisclosed fee. The chip provider will give Apple a six-year licence to its patents with an option for a two-year extension. It also signed a multiyear chip supply agreement with Apple. Qualcomm said that it expects a $2 increase in its earnings per share as a result of the deal from a combination of royalties and chip sales.

Estimates by UBS suggest Apple’s settlement payment may have been between $5bn and $6bn, and that it may be paying Qualcomm between $8 and $9 per iPhone in patent royalty fees. If these figures are close to reality, they demonstrate how Apple’s huge market power is diminished when it comes to essential technology for mobile communications – a lesson it previously learned when it paid a high price to settle patent disputes with Nokia.

UBS analyst Timothy Arcuri made the estimates after the two companies said, in a statement, that the settlement included a one-time payment from Apple to Qualcomm, as well as a chipset supply agreement (suggesting, though not confirming, that future iPhones would use Qualcomm chips).

He wrote in a client note that the deal was “a solid outcome for Qualcomm and certainly better than the $5 [royalty payment] assumption we had been making.” A royalty figure of $8 to $9 per iPhone would be an increase over the $7.50 that Apple previously paid,  according to Apple COO Jeff Williams’ testimony in a hearing before the Federal Trade Commission last year.

Outcome shows smartphone makers can’t escape Qualcomm:

Apple’s decision to bury the hatchet with Qualcomm shows how far the chip provider still dominates the modem market, in which it has seen off challengers from Nvidia to Broadcom, and repeatedly stolen a lead of at least a year over rivals in the first phases of a new technology, securing market shares that have often topped 75% in those early days. Stalwarts of 2G and 3G modems, like Texas Instruments, left the stage and new entrants failed to make much impact. Even MediaTek, and China’s SPreadtrum, which are credible competitors, remain well behind in 5G.

Qualcomm has its challenges, of course, from antitrust probes in multiple countries, to a shrinking addressable market (largely thanks to Samsung going it alone in modems). But the Apple settlement removes the biggest of those challenges, filling the major hole in revenues that the loss of the iPhone represented, and ending the most dangerous of the legal actions.

It is a significant reversal. Apple’s switch of allegiance appeared to set the stage for Intel to become a smartphone modem leader, delivering the biggest win yet from its acquisition of Infineon’s wireless business. Thanks to that deal, Intel is a top three handset modem provider, though before the iPhone deal, sales have always been weighted to lower-end models, and of course, the company failed to develop a successful smartphone system-on-chip, and pulled out of that modem/processor space in 2015.

Intel’s early 5G promise will not be realized:

Now it will exit another area of the smartphone market, the 5G modem, before it has really begun. This is a shock, given that Intel has been closing in on Qualcomm in terms of its 5G roadmap. It has appeared in major operator trials of the next generation networks – which are usually Qualcomm’s sole preserve – and has released a credible-looking product, with commercial launch dates not far behind the market leader’s.

But without Apple, the addressable market is a tough one. The world’s two largest smartphone makers, Samsung and Huawei, are increasingly relying on their own modem chips – they have made huge investments in these, but they gain control over the performance, availability and pricing of this critical component. Apple has asserted control in a similar way by developing its own iPhone processor, graphics processor and other elements, and has been reported to be working on its own 5G modem too.

Clearly, that has not materialized as yet, and this highlights, again, how difficult it is to develop an advanced smartphone modem, and how hard it is to steal a march on Qualcomm. Apple and Qualcomm are now locked together in an unhealthy co-dependent dance. In a declining market, thanks to Samsung’s and Huawei’s growing autonomy, any major position in 5G smartphones will rely on Apple’s patronage, as recent months have clearly demonstrated to Qualcomm.

The alternative is to support low cost handset makers, with their tighter budgets. Intel has chosen not to pursue that plan B, and will now put all its eggs in the IoT basket – though it said the same when it closed down its handset SoC operations, and little became of its plans to push its Atom low power processor into IoT devices.

On the other side, Apple has learned the costly lesson that, however much it resents its dependence on Qualcomm for both chips and patents, and however much it dislikes its supplier’s approach to the market, it cannot do without the company if it is to release a 5G iPhone in good time, and with the highest performance standards.