Microprocessor giant Intel (NASDAQ:INTC) won the modem spot inside last year's iPhone 7 and iPhone 7 Plus with its XMM 7360 cellular modem. Intel didn't get this spot exclusively -- it shares it with fellow chipmaker Qualcomm (NASDAQ:QCOM) -- but it's believed to supply a substantial portion of Apple's cellular modem needs for the iPhone 7.

The XMM 7360, unlike most of the chips that Intel builds, isn't manufactured by Intel. Instead, it is manufactured by a third party -- very likely Taiwan Semiconductor Manufacturing Company (NYSE:TSM) -- on a (rather mature) 28-nanometer manufacturing technology.

A wafer of Intel Itanium processors.

Image source: Intel.

The follow-on, known as the XMM 7480 -- the chip that's likely to power a large portion of Apple's upcoming iPhone models -- is also expected to be manufactured by TSMC, likely again using a 28-nanometer technology. After the 7480, though, comes the XMM 7560, which Intel says is manufactured in the company's 14-nanometer technology. This modem should power some of the 2018 iPhone models. This chip, as well as its successors, has the potential to be a good way for Intel to keep its older-generation factories utilized.

Some background

Chip manufacturing companies usually put into place some fixed amount of capacity for a given manufacturing technology, based on the company's demand forecasts. In Intel's case, it builds capacity for a new technology based on what it believes will be peak shipments on that technology (driven largely by the expected demand for its PC and data-center processors).

Intel's main PC and data center processors will be manufactured on a given technology for several years -- historically, it has been about two years, but that's lengthening to at least three years. Once an all-new manufacturing technology is introduced, though, Intel will begin transitioning its core processor products from an older technology to a newer one.

Now, just because Intel transitions its processors to a new manufacturing technology doesn't mean that there will be no use for the older manufacturing capacity. Some of the equipment inside those older factories is reused for future manufacturing technologies, but Intel has a lot of non-processor product lines that it usually keeps a step or two behind its main processor products in terms of manufacturing.

It's those products that can ultimately fill the void left by the processors.

Today, Intel's cellular modems don't serve the role as "factory filler" -- at least not for Intel, since those chips are manufactured elsewhere. However, with Intel's XMM 7560 and beyond, they will be able to do their part.

What does this mean for Intel?

Over time, I expect Intel's annual modem shipments to roughly trend to one-half of Apple's annual iPhone shipments on a unit basis, or somewhere around 100 million units (obviously varies based on Apple's own iPhone shipments and the exact split between Intel modems and Qualcomm modems).

It's hard to know exactly how large these modem chips are, since die sizes are not readily available. However, I think we can make a somewhat educated guess as to how large the die size of a typical cellular baseband chip is.

According to Chipworks' teardown of the iPhone 6s, the package size of the Qualcomm MDM9635 cellular baseband is approximately 75 square millimeters. The package size of the Apple A9 applications processor (APL0898) is about 215 square millimeters. The die size of the APL0898 is 96 square millimeters, so the ratio of the die size to the package size is 96/215 or ~0.44. If we assume a similar ratio for the baseband's die size to the package size, then we get a die size of around 33 square millimeters.

So, for the purposes of our analysis, let's suppose that the XMM 7560, manufactured in Intel's 14-nanometer manufacturing technology, is roughly 30 square millimeters (greater functionality than the older Qualcomm modem offset by the smaller manufacturing technology.

From a volume perspective, working under these (admittedly very crude) estimates, 100 million cellular modem chips at 30 square millimeters a piece is equivalent in volume to 30 million chips measuring in at 100 square millimeters a piece -- the approximate size of a current dual-core Intel Core processor. Looked at another way, the potential volume here is roughly equivalent to between 10% and 15% of Intel's personal computer chip shipments.

Cellular baseband chips, then, wouldn't be enough to completely make up for the migration of Intel's main processors to a newer manufacturing technology, but it would dramatically boost the volumes of chips that Intel builds on its older-generation manufacturing technologies.

In other words, a nice way for Intel to wring out more revenue and profits from preexisting factory infrastructure. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.