There were signs of Intel’s struggles in their 5G modem development back in February when the company revealed that the previously announced XMM8160 slated for 2019 debut would be delayed until first half of 2020. This delay would obviously cut into the 5G design cycle for their most prominent and largest customer Apple. Chatter began on the possibility that Apple may miss out on the 2020 5G smartphone launch as the iPhone maker was currently mired in a protracted law suit against Qualcomm on the terms of IP royalty payments thus leaving the Cupertino titan without an alternative 5G modem supplier.
The saga of Apple vs. Qualcomm is a storied one which dates back to 2017 when Apple, having recently secured a second source for LTE modems with Intel, proceeded to negotiate a new supplier contract with Qualcomm. When favorable payment terms that were tied to the stipulation that Apple uses only Qualcomm modems for iPhones were taken off the table, Apple balked at the increased effective royalty rates and sued Qualcomm for unfair licensing practices. Subsequently, Apple stopped all royalty payments to Qualcomm which prompted at least one other major OEM to follow suit. Qualcomm’s technology licensing business (QTL) took a significant revenue hit and shook investor confidence as revenues to Qualcomm’s cash cow licensing business began to taper off.
Fast forward to yesterday, Tuesday April 16th - opening arguments had just begun in the case of Qualcomm vs. Apple when at around 4pm PST, an announcement of a settlement was announced. This surprised development posed an anti-climactic end to a protracted two-year-old lawsuit. The terms of the settle were sealed and posed more questions than answers to the press and analyst community.
One hour later, the optics of this rushed settlement came into focus as Intel pushed out a statement by the newly appoint CEO Bob Swan stating that the storied chip maker will abandon development and sale of 5G modems for devices. Citing lack of a significant return on investment, the former CFO and interim CEO refocused the company’s efforts around their core enterprise and computing products.
In light of this new news, it was made abundantly clear to everyone that Intel, who is Apple’s current sole supplier for LTE modems, would leave Apple in the lurch as they attempt to catch up to the rest of the industry with 5G capabilities. But why did this announcement come on the heels of the settlement news? Perhaps Apple knew of the impending news from their only modem partner and needed the time to negotiate the best terms with Qualcomm? Or perhaps both feuding parties knew of the endgame was in sight and decided to cut to the chase and settle? We may never know as the settlements are sealed.
Handwritings on the Walls
In late 2018, news of Aicha Evans departure from Intel managed to raise a few eyebrows. Aicha was at the helm of Intel’s mobile division as the semiconductor maker navigated its way back into Apple’s supply chain. Having bought into the Apple business in 2010 with the purchased Infineon’s wireless business, Intel quickly lost the iPhone modem socket in 2011 as Apple decided to go exclusive with Qualcomm. Tasked with re-invigorating the mobile division, Aicha pursued a multi-year plan to win back Apple. Ms. Evans’ strategy was to regain Intel’s foothold with a big LTE modem win and then mount a credible challenge to Qualcomm in 5G. While she was ultimately successful at the winning back Apple, Intel’s LTE solution were arguably inferior to those of Qualcomm. Also, by focusing on the long-term strategy of “winning in 5G”, Intel’s mobile division basically ran a break-even operation as they eagerly met Apple’s stringent engineering support and pricing demands.
The departure of Brian Krazanich as CEO in 2018 prompted CFO Bob Swan to step in as interim CEO. This development very likely hastened the demise of the mobile chip division as the financials of the mobile division gave the new CEO pause putting into question his fiduciary responsibilities to investors to get the most return on investment. Ms. Evans departure was likely the canary in the coal mine as she over saw 5G development delays and her long-term strategic plan fall apart. Of course, there are a lot of speculation that is mixed in with these past few paragraphs, but all signs point to a losing mobile proposition for Intel just waiting for the new CEO to act on.
At the end, Intel’s announcement cleared much of the confusion in the dramatic turn of events in the of the trial between Qualcomm and Apple. Clearly, the winner out of this protracted legal fight was Qualcomm and they will return to be the sole leading supplier of modem chipsets to iPhones. Having been forced back to the negotiating table with Qualcomm, Apple likely gave up more concessions than Qualcomm. At the end, Apple will have access to leading 5G modems, Qualcomm has protected their high-margin licensing business model and Intel’s business focus becomes clearer. At last check QCOM closed the day trading at +23% while AAPL and INTC remained flat.