It has been long rumored that microprocessor specialist Intel (NASDAQ:INTC) had won some share inside of Apple's (NASDAQ:AAPL) upcoming iPhone. In particular, numerous news outlets as well as financial analysts have claimed that Intel will supply cellular baseband processors to Apple for the next-generation iPhone.
On June 10, Bloomberg independently confirmed that this would be the case and added some additional details on which models would get the Intel chips.
Intel's highest-profile U.S. smartphone win
According to Bloomberg, Apple will use Intel's modems for iPhones "used on AT&T (NYSE:T) Inc.'s U.S. network and some other versions of the smartphone for overseas markets," citing "people familiar with the matter."
This doesn't come as a surprise given that Intel's modems lack CDMA/EV-DO support, critical for both the Verizon network as well as the China market. Intel acquired the CDMA assets of Via Telecom late last year in a bid to implement these standards into future modems, which could boost Intel's ability to gain modem share at Apple out in time.
The real winner here is Apple
The Intel iPhone modem win had been widely reported in the press for quite some time. DIGITIMES reported back on May 16 that Intel is expected to "supply up to 50% of the modem chips for use in the new iPhones slated for launch in 2016."
Qualcomm itself even hinted that this was coming on its most recent earnings call when it told investors that its long-term margin targets have "consistently factored in a range of second sourcing assumptions at [Qualcomm's] large customers."
Although Intel will gain some modem revenue at Qualcomm's expense (though the amount of revenue at stake here likely isn't enough to have a meaningful impact on the fortunes of either company), the real winner here, in my mind, is Apple.
Apple tends to like to have multiple sources for components. This reduces Apple's risk and allows it to play suppliers against each other in order to get better pricing. I expect as a result of bringing Apple into the mix, Apple's blended modem costs will come down, which should give the company freedom to enhance other portions of its phone while keeping total cost structure in check.
I suspect that Apple's ability to squeeze Qualcomm during this cycle is relatively limited because Apple still needs a modem with CDMA/EV-DO support for many critical networks. Once Intel has an alternative that could conceivably replace Qualcomm-built modems in all iPhones (not just a subset), Apple could conceivably exert additional pricing pressure on Qualcomm.
The next modem that Intel has coming is the XMM 7480, which does not support CDMA/EV-DO. In light of this, it won't be until the 2018 iPhone at the very earliest that Intel will have a product that could potentially replace Qualcomm's in every new iPhone sold.