The iPhone manufacturer has bought Intel’s smartphone modem business for $1 billion – part of the firm’s move to cut reliance on third party suppliers and move expertise in-house
Apple has acquired the majority of Intel’s smartphone modem business – the part that connects devices to Wi-Fi and cellular networks – for a hefty $1 billion (£800m). The deal means about 2,200 staff will move over to Apple, and the company will acquire intellectual property and equipment from Intel.
Apple’s phone sales dipped in the first quarter of 2019, and its progress on 5G has been sluggish compared to competitors. This acquisition is the company’s latest push to control the entire smartphone production ecosystem, but what does this mean for Apple’s currently choppy trajectory?
“I don’t think anyone’s really surprised by the acquisition,” says Alan Priestley, a analyst at Gartner. “There weren’t that many obvious contenders to buy the group, and Apple has been known for a long while to be wanting to get more control over its own technology.”
Apple has typically relied on Intel and Qualcomm for the production of its smartphone modems, generally splitting orders between the two companies. Qualcomm’s modems have long been recognised as faster than Intel’s, and the company is ahead on developing 5G modems, which have already been integrated into the likes of Samsung’s Galaxy Note 9.
However, there’s a reason Apple has not benefited from these capabilities recently: until April of this year, it was engaged in a two-year-long legal battle with Qualcomm. Apple sued the company for extorting its position as the dominant player in its market to ramp up licensing fees, while Qualcomm sued Apple over patent violations. Finally, the dispute was resolved when the companies chose to settle – a decision that was widely attributed to Apple being stuck on how to source competitive modem technology, given that Intel was deemed behind on 5G.
Apple signed up to a six-year global patent licensing agreement with Qualcomm which involves the company supplying modems for its phones. Shortly after the agreement, Intel announced it was suspending its development of 5G modem parts, signalling a lack of demand from Apple or any other major competitor. But while Apple will rely on Qualcomm for the near term, its purchase of Intel’s modem business signals a desire to bring its whole production cycle in-house. This is something was first floated as an aim for the giant in 2009, when Tim Cook announced to investors the company would create the technology it required as a point of differentiation with competitors. Some analysts have predicted that Apple’s custom designed modems could be ready within three years.
“I think we’ll see future generations of iPhones that have a fully integrated modem,” says Priestley. “At the moment, Apple is unusual in that they use a discrete modem – most other smartphone vendors are using integrated modems.” This means that in Apple phones, the modem is a separate chip rather than being integrated into the application processor, a design feature that requires more space and power within the phone.
Apple’s Intel purchase reveals a desire to one day grasp the reigns of modem production itself, without having to rely on third party suppliers. But given Intel has been trailing Qualcomm in the modem sphere, will the acquisition allow Apple to compete on this front? “The acquisition is necessary but not sufficient,” says Geoff Blaber, vice president of research at CSS Insight. “It’s still going to take Apple years to establish a modem capability that can compete with Qualcomm. What the Intel deal does is reduce the development time by adding engineering resource and put it in a stronger negotiating position when it comes to licensing.” Modem chip development is incredibly intensive, requiring a huge injection of capital, as well as top notch engineering talent, years of R&D investment, and an impressive portfolio of intellectual property.
Apple has taken this autonomous approach to creating smartphone and tablet processors. The iPad, released in 2010, contained Apple’s first processor designed in-house: the A4. Custom chip components have since been used to power capabilities such as Face ID, Touch ID data and step tracking technology. For example, when engineering selfie-taking technology, an in-house team devised a custom display chip that would briefly illuminate the screen three times more than normal for the iPhone 6S. This approach is fairly unorthodox in the smartphone business, where companies typically rely on a network of third party suppliers to assemble the innards of their smartphones, although Samsung is also a major chip manufacturer.
Apple has signalled its desire to create its own modem chip for a while, with reports earlier this year that the company had moved its modem chip engineering effort from its supply chain unit to its in-house hardware technology group. The company owns chip building and testing facilities in Cupertino, California and Herzliya, Israel, and an increasing number of modem engineers have also been poached from Qualcomm over recent years.
Acquisitions have bolstered Apple’s production capabilities. Most recently, the company bought part of European chipmaker Dialog Semiconductor in a bid to bring more of its silicon design in-house. The deal covered $300 million (£242m) to license some of Dialog’s technologies, acquihire 300 engineers, and control some assets. Another $300m has been assigned to the purchase of Dialog products over the next three years.
One billion dollars is arguably pocket change for the hulking giant sitting atop a cash pile of $248bn (£200bn). But despite its revenues and cash reserves dwarfing other smartphone companies, the tech giant has been flagging of late.
While in late 2018, Apple seemed on track to grab the largest share of the global smartphone market from Samsung, it has since pulled into third place behind Huawei (which has been suffering from its own problems for the last six months). The company has also fallen behind on the development of 5G phones. The launch of an Apple 5G phone is billed for next year at the earliest, while others including Samsung, Huawei and Motorola have already brought 5G phones to market. However, when considering how injurious this could be to Apple, it’s important to consider that Apple has rarely led the charge when it comes to connectivity: it didn’t launch the first 3G or 4G phone, yet managed during this time to ascend to the highest valued company in the world.
But despite lagging behind right now, Apple is playing the long game. “This is about taking control of a very high cost component that has huge system level implications when it comes to performance and user experience,” Blaber says. “By taking development in-house Apple can optimise, reduce cost and potentially boost margins.” However, designing all of this in-house only makes sense so long as Apple continues to be one of the biggest phone manufacturers in the world. The company can’t underestimate the importance of staying ahead of the curve, particularly at this vulnerable time.