It turns out that when you demand "extortion-level" royalties from your most important customer, that customer might not end up very happy.
Apple (NASDAQ:AAPL) and Qualcomm (NASDAQ:QCOM) remain embroiled in an escalating legal battle that kicked off just over a year ago, which revolves around Qualcomm's alleged anticompetitive business practices that included forced exclusivity, preventing rival modem makers from even having a chance to win some of Apple's business. The European Commission just slapped Qualcomm with a massive $1.2 billion fine over the arrangement, which Qualcomm is appealing.
That exclusivity expired in 2016, allowing Intel (NASDAQ:INTC) to come onboard as a second supplier for baseband modems for the first time in years. It looks like Apple might be expanding its relationship with Intel, and may be considering ditching Qualcomm as a modem supplier completely this year.
In a fresh research note shared over the weekend (via MacRumors), KGI Securities analyst Ming-Chi Kuo is making that prediction: "We expect Intel to be the exclusive supplier of baseband chip for 2H18 new iPhone models, while Qualcomm may not have a share of the orders at all."
The respected analyst with a solid track record had previously estimated that Intel would source 70% of modems for the 2018 iPhone lineup, but now believes Intel will win 100% share of Apple's modem business. Intel's newest XMM 7560 modem importantly adds support for CDMA networks, a crucial functionality that would allow Apple to make the switch, as prior Intel modems did not support that technology. Intel has recently started sampling the XMM 7560 to customers.
A second opinion
It's not just Kuo predicting the total shift to Intel. Instinet released a research note this morning (via Tech Trader Daily) stating that Apple will "source 100% of thin modems from Intel." It's true that Qualcomm's modems are still technically better than Intel's in terms of performance, but Intel has made meaningful progress in closing that gap in recent years. Analyst Romit Shah believes the XMM 7560 is now "good enough."
Switching to Intel looks especially appealing when factoring in cost savings, since Intel is undercutting Qualcomm on price. Shah estimates that Apple transitioning 100% of its modem business to Intel could translate into approximately $105 million in cost savings compared to the last product cycle.
Good news and bad news
The reports have knocked Qualcomm shares down today, with the fears overshadowing news that Broadcom (NASDAQ:AVGO) is raising its offer to acquire Qualcomm to $82 per share, which Broadcom says is the "best and final offer." Broadcom has been trying to acquire Qualcomm since late last year. The new offer includes a greater stock component valued at $22 per share, in addition to the same $60 per share in cash from the prior offer. The offer values Qualcomm at over $120 billion, and would represent the largest tech acquisition ever.
Investors are probably right to focus more on the potential loss of Apple's business, which could devastate Qualcomm's business. Apple, Samsung, OPPO, and vivo collectively represented 51% of total consolidated revenue in fiscal 2017. That would have a very tangible effect in the near term, while the potential deal with Broadcom carries considerable regulatory risk and would take quite some time to play out.
The mobile chip giant messed with the wrong customer.