Qualcomm and Apple Settle All Litigation; Qualcomm to Supply Apple Chips; Intel Abandoning 5G mobile modems [updated]

Analyst First Impressions

What happened

In the midst of multiple ongoing IP lawsuits, Apple and Qualcomm have settled. The agreement ends all ongoing litigation, Apple is globally licensing Qualcomm IP, and Qualcomm will be supplying Apple with chipsets. [After these announcements, Intel issued a press release stating that it would be exiting the 5G mobile modem space.]

What this means

After single-sourcing modems from Intel for the most recent iPhones, Qualcomm modems will once again be designed into future iPhones. There is no reason to think that Apple will be buying Qualcomm application processors, as Apple's own designs are generally regarded as superior. But Qualcomm is the leader in cellular modems, and using Qualcomm silicon greatly accelerates Apple's ability to field a 5G iPhone. That is still not likely until 2020 in the U.S., but it shouldn't slip beyond that. If Apple fast tracks a unique 5G iPhone for China - which it may need to do for competitive or even regulatory reasons - it could reach the Chinese market sooner.

Apple could afford to fight forever and likely could have survived 5G delays, making Qualcomm the biggest winner here. Not only is Apple paying Qualcomm today and removing the threat of lawsuits, the agreement validates Qualcomm's business model of selling chipsets and licensing IP.

Intel is the most immediate loser, as this could mean the end of Intel's modem business. Not immediately - Apple is unlikely to redesign iPhones that use Intel modems today - but Apple was a large customer. [Intel later confirmed that it is winding down this business; see below.]

Realistically, Intel had to assume that Apple was going to build its own modem at some point - Apple has been aggressively hiring RF engineers in San Diego, where Qualcomm is located. Apple’s new agreement with Qualcomm accelerates the move off of Intel, and takes the pressure off of Apple's internal modem development group. Apple is unlikely to shutter that group; Apple still has strong strategic reasons to vertically integrate this piece of its supply chain if it can.

Why now? [added Apr 16 4:26 PM ET]

Qualcomm has had every incentive to settle as long as it could protect its IP licensing business model generally. It won some recent IP suits against Apple, but they were mostly symbolic (the cost of litigation likely outweighed the verdict award). Apple may have settled because it was able to get more favorable terms than it might have gotten if it lost the current suits, but the settlement certainly implies that Apple was not confident that Intel could deliver 5G modems in the timeframe that Apple needed.

Intel is Exiting 5G phone modems [added Apr 16 11:00 PM ET]

Just hours after Apple and Qualcomm announced their settlement, Intel issued its own press release that it plans to exit the race to 5G modems for smartphones (previously scheduled to launch in 2020). It takes a while to make this type of decision and craft a press release, and Intel obviously had it ready to go, just waiting for Apple to make its own announcement. Intel claims that it is abandoning its 5G smartphone modem project because “there is no clear path to profitability and positive returns.” That could mean that Intel did not believe it could grow the business beyond Apple, that its deal with Apple was not profitable, or that Intel’s new management could not justify investing in new modems for Apple while Apple built its own group to eventually replace them. Technical difficulties with the 5G mobile modem project may have played a role in the decision as well. Mobile 5G modems are a core part of Qualcomm’s business not an Apple-related R&D expense, so Qualcomm can afford to work with Apple for six years and then see where things stand. Intel would rather focus its 5G R&D on more strategic opportunities in infrastructure, auto, and computing. It is also possible that Intel will license its modem IP to Apple down the road as well, possibly as a way of transitioning out of the 3G/4G modem business faster.

Report contact

To discuss the implications of this report on your business, product, or investment strategies, contact Avi at avi@techsponential.com or +1 (201) 677-8284.

Press Releases

Apple and Qualcomm: https://www.apple.com/newsroom/2019/04/qualcomm-and-apple-agree-to-drop-all-litigation/

Intel: https://newsroom.intel.com/news-releases/intel-modem-statement/