Apple & Intel – Fuzzy logic

Acquiring Intel’s modem business now makes no sense.

• The WSJ (see here) is reporting that Apple is close to buying Intel’s modem business but given that Apple has accepted a crushing defeat in its battle against Qualcomm, this makes no sense.
• To understand this view, one must look at the history.
• Usually what happens in these patent fights is that pressure and legal rhetoric slowly builds up in a series of tit-for-tat skirmishes until something happens that shifts the power balance meaningfully that brings one side to the table.
• A deal very quickly follows.
• In the 2008 battle between Nokia and Qualcomm, it is not clear what it was that brought Qualcomm to the table, but this time it is clear.
• Intel had had enough of losing money on cell phone modems and had decided instead to shift its focus elsewhere and put the business up for sale.
• Intel has been Apple’s sole supplier of modems since the iPhone Xs, leaving Apple very few options outside of MediaTek with Intel out of the picture.
• There is no way that Apple can take the risk of being without a supplier of modems and given its two-year design cycle, serious 5G decisions need to be taken now.
• I am fairly certain that prior to settling with Qualcomm, Intel communicated its intentions to Apple and gave it the option to purchase the business.
• Apple passed on this because Intel was very unlikely to have been able to meet Apple’s requirements for a working 5G modem and so it made no sense to buy the business.
• Therefore, with a materially weakened hand to play, Apple was forced to give in to Qualcomm and resume what it had been paying for the last 12 years.
• As a result of the settlement, it now makes even less sense to buy the business now than it did a few months ago.
• Some commentators are of the opinion that this is about 4G rather than 5G but this also makes no sense in my opinion.
• The future of 5G in almost all implementations will be a baseband that is integrated with all of the other radio technologies.
• If Apple is having to use Qualcomm’s baseband for 5G for 6 years (see here) then the price it is paying for modem will also include 4G and so there will be no reason not to use it.
• The only possibility that I see is a very long-term acquihire by Apple whereby it takes all of Intel’s engineers and IP and gives them 6 years to come up with a working 5G / 4G integrated modem.
• This gives Qualcomm 6 years to come up with the next iteration of mobile technology to keep Apple dependent on its chipsets.
• Hence, if Apple does buy the Intel modem business, I do not see this a short-term negative for Qualcomm but it will keep the pressure Qualcomm it to ensure that its technology remains indispensable.
• Qualcomm has suffered following the FTC ruling but if it can navigate its way through this latest roadblock, it remains one of the most attractive options in the smartphone market.
• The other is Samsung of which my portfolio is already long.