Intel (NASDAQ:INTC) was Apple's (NASDAQ:AAPL) only modem supplier for its 2018 iPhone lineup, which includes the XS, XS Max, and XR. That has been quite a windfall for Intel, as its modem revenue has soared. Many believed that the decision to exclude Qualcomm (NASDAQ:QCOM) modems from last year's iPhones stemmed from the legal war that continues to wage between the two companies (now approaching its two-year anniversary this month).
It turns out it was Qualcomm's decision not to sell Apple any cellular modems.
Apple would have preferred to dual-source
Apple COO Jeff Williams testified this morning as part of the Federal Trade Commission antitrust trial (the regulator had separately filed a complaint against Qualcomm within days of Apple's suit). CNET reports that Apple's original plan was to dual-source modems from both Qualcomm and Intel, but Qualcomm refused to sell the iPhone maker the crucial chips due to the ongoing licensing dispute, according to Williams.
"The strategy was to dual-source in 2018 as well," Williams said. "We were working toward doing that with Qualcomm, but in the end they would not support us or sell us chips."
Williams then added that he reached out to Qualcomm CEO Steve Mollenkopf directly but was unable to convince the chief executive. Williams then contacted Intel's then-CEO Brian Krzanich to see if Intel could supply the volumes that Apple required. Intel had to "scramble" to meet Apple's needs, and Apple "would have loved to continue to have access to Qualcomm's tech."
In general, Apple prefers to source components from multiple vendors whenever possible, because it gives the company greater negotiating leverage that can bring down costs, and also reduces operational risk by diversifying its supply chain.
Qualcomm's self-inflicted hit
Regulators allege that Qualcomm's "no license, no chips" policy is anticompetitive, as it forces customers to license Qualcomm's technology at onerous terms in order to get access to a supply of baseband processors. Thanks in part to the policy, Qualcomm was able to push many competing vendors out of the market over the past decade, becoming the most powerful Apple supplier ever.
Apple has never licensed Qualcomm's intellectual property (IP) directly, but instead its contract manufacturers ink licensing deals and Apple has historically reimbursed them. Apple has tried to license from Qualcomm directly, but Qualcomm prefers to license to manufacturers that have no incentive to negotiate, passing along those costs in full to Apple. The Mac maker has since stopped reimbursing its manufacturing partners amid the dispute, and those manufacturers in turn stopped paying Qualcomm, which has weighed on its licensing business.
"The combined impact of Apple instructing their contract manufacturers to stop paying their contracted royalty payments and Apple's decision to use a competitor's modem for their latest device has had a significant impact to our financial performance," Mollenkopf said in November.
Curiously, Mollenkopf also noted that some of the Apple-related headwinds that the mobile-chip giant expects to face in fiscal 2019 will also impact its QCT segment, which is its chip business. It sounds like that hit was self-inflicted, based on Williams' testimony.
Check out the latest Qualcomm earnings call transcript.
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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.