Apple Is Designing iPhones, iPads That Would Drop Qualcomm Components -- Update
31 October 2017 - 12:17PM
Dow Jones News
By Dana Mattioli and Tripp Mickle
Apple Inc., locked in an intensifying legal fight with Qualcomm
Inc., is designing iPhones and iPads for next year that would
jettison the chipmaker's components, according to people familiar
with the matter.
Apple is considering building the devices only with modem chips
from Intel Corp. and possibly MediaTek Inc. because San Diego,
Calif.-based Qualcomm has withheld software critical to testing its
chips in iPhone and iPad prototypes, according to one of the
people.
Qualcomm, which has worked with Apple for a decade, stopped
sharing the software after Apple filed a federal lawsuit in January
accusing Qualcomm of using its market dominance unfairly to block
competitors and to charge exorbitant patent royalties, this person
said. Qualcomm has said Apple is mischaracterizing its
practices.
Apple's planned move for next year involve the modem chips that
handle communications between wireless devices and cellular
networks. Qualcomm is by far the biggest supplier of such chips for
the current wireless standard.
Qualcomm said its "modem that could be used in the next
generation iPhone has already been fully tested and released to
Apple." The chip company said it is "committed to supporting
Apple's new devices" as it does for others in the industry.
Apple in the past used only Qualcomm modem chips for iPhones,
but started also procuring the chips from Intel for its iPhone 7
and 7 Plus models last year. It again used a mix of the two in the
iPhone 8 and 8 Plus that started selling in September.
Apple's plans to exclude Qualcomm chips from next year's model
could still change. People familiar with Apple's manufacturing
process said the company could change modem-chip suppliers as late
as June, three months before the next iPhone is expected to ship.
Still, some of the people said Apple hasn't previously designed
iPhones and iPads to exclude Qualcomm chips at a similar stage of
the process.
The Apple plans indicate the battle with Qualcomm could spill
beyond the courtroom feud over patents into another important
Qualcomm business where it has the potential to send ripples
through the smartphone supply chain. Qualcomm last year sold around
$3.2 billion of modem chips a year to Apple, or 20% of its total
chip sales, according to an estimate by Macquarie Capital. This
year, Qualcomm's chip sales to Apple are likely to come to $2.1
billion, or 13% of total chip revenue, reflecting more fully the
iPhone 7's mix of Qualcomm and Intel modems.
Selling chips is generally less profitable for Qualcomm than its
patent business. Apple paid $2.8 billion last year in Qualcomm
royalties, which accounted for nearly 30% of the chip maker's
per-share earnings, according to Macquarie Capital. In the last
year, Apple has stopped reimbursing those fees to iPhone and iPad
manufacturers, which in turn have stopped paying Qualcomm.
Qualcomm Chief Executive Steve Mollenkopf earlier in October
described the dispute with Apple as "fundamentally about pricing"
and expressed optimism that the two companies would find common
ground. "For big companies, you sometimes have these disputes but
you have a broader relationship," he said at the The Wall Street
Journal's WSJ D.Live conference.
Jettisoning Qualcomm chips would create risks for Apple.
Semiconductor analysts widely consider modem chips from Intel and
MediaTek, a smaller chip designer based in Taiwan, to lag Qualcomm
in performance in areas such as download speeds. For example,
Qualcomm has shipped a chip in phones that can process 1 gigabit of
data per second, while Intel and MediaTek haven't demonstrated
modem chips that fast, said Patrick Moorhead, principal analyst at
technology research firm Moor Insights & Strategy.
Also, Apple typically wants at least two suppliers of key iPhone
components to bolster its negotiating leverage, according to people
familiar with its procurement process. So it would have to add a
new supplier such as MediaTek in addition to Intel to maintain that
for modem chips.
If Apple -- which ships more than 200 million iPhones annually
-- taps Intel and MediaTek to provide modems for future handsets,
both would stand to gain a greater piece of the roughly $5 billion
market for stand-alone modem chips. Qualcomm currently dominates
that market with a 50% unit share while MediaTek has a 25% share
and Intel a 6% share, according to market research firm Strategy
Analytics.
Intel's chips so far have been designed to manage communications
for only one of two earlier-generation cellular standards still in
use, while Qualcomm's chips have been capable of handling both. As
a result, Intel has been trying to broaden its portfolio to catch
up with Qualcomm and this year announced a chip compatible with
both of those standards. The chip would be Intel's first modem that
works with a full scope of wireless carriers. Intel hasn't said
when the unit would be available.
Qualcomm and Intel also are vying for leadership in the next
generation of wireless technology, known as 5G. Phones featuring
5G-capable chips are expected to hit the market largely in 2019,
and Qualcomm is ahead of many peers, said Mr. Moorhead of Moor
Insights & Strategy.
Write to Dana Mattioli at dana.mattioli@wsj.com and Tripp Mickle
at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
October 30, 2017 21:02 ET (01:02 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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