Analyst Christopher Rolland with Susquehanna (by way of Barron's) recently put out a note suggesting that Intel (NASDAQ:INTC) may be able to wrestle away more cellular modem market share from Qualcomm (NASDAQ:QCOM) in future Apple (NASDAQ:AAPL) iPhone models.
By way of background, Apple currently sources cellular modems from both Intel and Qualcomm in its iPhone 7 and iPhone 7 Plus smartphones. Rolland estimates that Qualcomm has between a 50% and 70% share of iPhone modem shipments, leaving Intel with between 30% and 50%.
The analyst points out that Intel's recently announced XMM 7560 modem supports the CDMA wireless standard, a feature that Intel's previous modems have lacked. Since some wireless carriers require CDMA support, Apple couldn't completely abandon Qualcomm in the iPhone.
"We believe CDMA support was a gating issue in winning the majority of iPhone 7 sockets, as select global carriers require the standard," Rolland writes.
The analyst then says if Apple were to ditch Qualcomm completely in favor of Intel modems, it would lead to a $1.1 billion to $1.4 billion reduction in Qualcomm's revenue and a drop of between $0.25 and $0.35 per share in earnings.
Intel, the analyst says, could stand to see revenue grow by between $800 million and $1.1 billion from such a switch, with earnings per share growing between $0.06 and $0.08.
There's little doubt that having a CDMA-capable modem only helps Intel and hurts Qualcomm as it relates to the iPhone, but I don't think it's realistic to expect Apple to fully ditch Qualcomm. Here's why.
Two suppliers are better than one
There are good reasons to have multiple suppliers for critical components. Having multiple suppliers helps to guard against potential execution problems on the part of a single supplier, such as supply issues and product-quality issues.
To be blunt, Qualcomm's track record with respect to cellular modem advancements is impeccable; Intel's execution, meanwhile, seems to have improved solidly over the years, but it's still not a good idea to bet the iPhone on Intel.
Beyond risk mitigation, though, having multiple competent suppliers in the mix improves the buyer's ability to negotiate prices to its benefit.
Remember, until Intel announced the XMM 7560, Apple essentially had one company from which it could buy CDMA-capable LTE modems -- Qualcomm. So if Apple wanted to sell phones compatible with networks that required CDMA support, it needed to buy chips from Qualcomm -- period.
Moreover, in a recent lawsuit that Apple filed against Qualcomm, the former claims the latter charged Apple a "monopolistic premium" for cellular modems with CDMA support, even though those chips were "in all other respects identical to the chipsets sold to Apple without CDMA functionality enabled."
If Apple had previously had multiple supplier options for CDMA-capable LTE modems, Qualcomm might not have been able to get away with charging such a premium.
So by having both Qualcomm and Intel in the mix supplying modems that are, for all intents and purposes, interchangeable, Apple should be able to lower its component costs and ultimately either boost its gross profit margins or redirect the savings to adding more features to future iPhone models.
Qualcomm may see lower allocation
Though I don't think it's likely for Qualcomm to lose all the iPhone business, I could see Qualcomm's share at Apple come down. Further, I could see Qualcomm's average selling prices of the chips that it does sell to Apple coming down from where they would have otherwise been if Intel weren't on the verge of releasing a CDMA-capable modem.
The situation doesn't look great for Qualcomm, and it looks pretty good for Intel, but in the scheme of both companies' respective consolidated revenues, this just isn't a potential game changer for either one.