Iphone
Image source: Apple.

It's been rumored for some time, but Bloomberg is now reporting that Intel (NASDAQ:INTC) has won at least some of the LTE modem sockets in Apple's (NASDAQ:AAPL) forthcoming iPhone 7. Intel will split the socket with Qualcomm (NASDAQ:QCOM), which previously acted as the sole modem supplier for Apple's smartphone.

This is a big win for Intel, which has struggled to break into the smartphone market in any significant way. It also puts further pressure on Qualcomm's chip business, and the move gives Apple leverage to pit the two chipmakers against one another.

Intel's new foothold

After several years of developing applications processors for smartphones, Intel finally decided to shut down that business earlier this year. However, its acquisition of Via Telecom's modem business late last year indicated that it was turning its focus toward the modem market, and the move appears to have paid off.

Intel will reportedly supply baseband modem chips for iPhones sold on AT&T's network, according to the Bloomberg report. BTIG analyst Walter Piecyk expects AT&T to sell between 22 million and 23 million iPhones this year. Intel will also supply the modems for other models in international markets. Notably, Qualcomm will keep the socket in models sold in China.

Even if Intel only takes about one-fourth of the sockets in iPhones, that's a nice bump in revenue for the chipmaker. IHS estimates the Qualcomm chip in the iPhone 6s costs Apple $13 per device. With Apple expecting to sell around 200 million iPhones, that's a potential $650 million payday for Intel.

While analysts expect Intel to generate over $57 billion in revenue this year, the iPhone win should help offset some of the losses it's taken on its mobile business thus far.

Apple's dual sourcing leverage

There are few companies with the buying power of Apple. And when Apple has multiple options, that's bad news for its suppliers. Although the iPhone maker typically sticks with its suppliers for a long time, it can be relentless in putting pressure on its suppliers' margins. Considering the scale of the iPhone, though, it's not a terrible deal for new suppliers. Few other contracts can practically guarantee hundreds of millions of units.

Intel's acquisition of Via Telecom's modem business means that Intel will be capable of producing both GSM and CDMA modems, so it potentially could completely take over the modem business should Apple tap its new iPhone supplier. That will keep the pressure on Qualcomm to play ball.

That means Apple could see a reduced cost for its iPhone modems going forward. The bill of materials in the iPhone increased noticeably with the release of the iPhone 6 due to the larger screen. Apple's gross margin actually improved, however, due to the growth in unit sales of the already high-margin iPhone. Still, keeping component costs down will allow Apple to produce better margins.

The baseband modem isn't a huge cost to begin with. As mentioned, Qualcomm is receiving only about $13 per unit. But when savings are multiplied by 200 million units per year, they start to add up.

Qualcomm investors should have seen this coming

Qualcomm's chip business has been under pressure as of late. Qualcomm CEO Steve Mollenkopf told investors during the company's last earnings call that he expects "second sourcing" at its largest customers to be a headwind going forward.

The important thing for investors to keep in mind is that Qualcomm owns a robust patent portfolio on 3G and 4G LTE technology. So, for every 3G/4G modem sold, Qualcomm receives a royalty based on the value of the device -- not the component. Qualcomm's licensing business generates the majority of its profits and isn't much affected by this deal.

Qualcomm is at the forefront of LTE technology, and it's well ahead of Intel. Because of that, its licensing business is still its major breadwinner, while the chip business continually brings in a lot of revenue for it to reinvest in R&D. As long as it maintains its sizable lead in IP over Intel, it has a decent shot at winning back the socket in the iPhone as carriers adopt its technology.

While the news isn't great for Qualcomm, it's certainly not the end of the world.

Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.