Last week, a report came out from Israeli website CTech claiming that Apple (NASDAQ:AAPL), which has been using cellular modems developed by Intel (NASDAQ:INTC) since 2016, wouldn't use Intel's upcoming 5G modem technology in the iPhone models that it expects to launch in 2020.
The report was later corrected to reflect that the chip Apple had chosen not to buy from Intel wasn't, in fact, a 5G cellular modem but instead a connectivity combination chip known as Sunny Peak.
That chip, CTech said in a corrected version of the article, is a "Wi-Fi and Bluetooth component designed by Intel for Apple's future phone."
CTech also said that Intel would halt development of the so-called Sunny Peak chip since Apple was supposed to be the "key mobile customer" and "main volume driver" of this product.
While Intel reportedly stopped working on Sunny Peak, the company is apparently "now looking to further improve Sunny Peak to get the component into Apple's 2022 mobile devices."
While, on the surface, this development might seem like a negative to Intel, it's actually much more of a potential negative for Broadcom (NASDAQ:AVGO). Allow me to explain.
Intel has nothing to lose, but Broadcom does
Today, Intel doesn't supply any Wi-Fi/Bluetooth connectivity chips into Apple's iPhones; Broadcom, on the other hand, has had this spot to itself for years.
Moreover, while Broadcom's overall business is quite diversified, its wireless chip business (31% of revenue during the company's fiscal year 2017 ) is heavily dependent on Apple. In fact, Broadcom said in its most recent annual filing that "more than 20%" of its revenue during fiscal year 2017 came from sales of chips to Apple.
If wireless chip sales represented 31% of Broadcom's overall revenue and sales to Apple made up "more than 20%" of Broadcom's total revenue, then a quick calculation tells us that almost 65% of Broadcom's wireless chip revenue came from sales of chips to Apple.
It's worth pointing out that Broadcom doesn't just sell wireless connectivity chips to Apple -- Broadcom provides Apple with touch screen controllers, radio frequency filter chips, and wireless charging chips for its devices. Nevertheless, Wi-Fi/Bluetooth combination chip sales into the iPhone make up a substantial portion of Broadcom's wireless chip business.
The fact that Intel thought that it was even in the running for the 2020 iPhone connectivity spot and is working hard to try again for the 2022 spot should have Broadcom investors concerned.
Now, to be clear, I doubt that Apple would shift entirely from a proven supplier like Broadcom to an inexperienced vendor like Intel for a product as important as the iPhone. However, given Apple's well-known desire for having multiple sources on critical components (more vendors means lower prices for the buyer), it wouldn't surprise me if Intel had hoped to win a minority allocation of the Wi-Fi/Bluetooth combination chips in the 2020 iPhone with Sunny Peak.
Implications for Intel
Selling wireless connectivity chips isn't Intel's core business -- such chips are basically complementary components to its main computer processor business.
Nevertheless, Intel has continued to improve its Wi-Fi/Bluetooth connectivity offerings in its bid to increase its share of wallet in the personal-computer market, and Intel hopes to accelerate this phenomenon by integrating this connectivity technology into its processors. So it's only natural that the company would like to grab a larger piece of the iPhone's bill of materials with such technology, too.
Obviously, in the near term, it looks like Intel's out of luck -- it apparently didn't win the 2020 iPhone spot and its next chance seems to be in the 2022 iPhone spot. So any potential financial implications from Intel's efforts to win connectivity share inside of Apple's iPhone could be years away.
Over the longer term, though, if Intel can build future Wi-Fi/Bluetooth chips that are good enough for Apple's iPhones, then it could win some share from Broadcom. Broadcom's total wireless chip business was worth $5.4 billion in 2017, with Apple's business likely making up roughly $3.5 billion.
It's hard to estimate how much of that wireless revenue was due to Wi-Fi/Bluetooth connectivity chips versus, say, RF chips and wireless charging chips, but if we take a wild guess and call it 50/50, and then assume that Intel could get 30% share, then the opportunity for Intel would be in the ballpark of $500 million.
That wouldn't be a game-changing win for Intel, which expect to generate more than $68 billion in revenue this year, but it'd certainly be a nice chunk of incremental, profitable revenue.