Please ensure Javascript is enabled for purposes of website accessibility

Intel Lost Billions Selling Its Modem Business to Apple

By Evan Niu, CFA – Nov 30, 2019 at 4:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple got a great deal.

It's been six months since Qualcomm (QCOM 0.90%) lost its monumental Federal Trade Commission trial. The mobile tech giant was able to score an enforcement delay in August, in part due to the Department of Justice coming to Qualcomm's defense and arguing that enforcement would hurt national security. Rival Intel (INTC -2.18%) has now filed an amicus brief in the case, arguing that federal Judge Lucy Koh's ruling should stand.

Over the summer, Intel sold the remnants of its smartphone modem to Apple (AAPL 1.55%) for $1 billion, and Intel now confirms it lost billions in that deal.

Hand holding an Intel 5G modem

Image source: Intel.

"Intel suffered the brunt of Qualcomm's anticompetitive behavior"

In a blog post, Intel general counsel Steven Rodgers says the company was the main victim of Qualcomm's shady ways, at least in recent years. "Intel suffered the brunt of Qualcomm's anticompetitive behavior, was denied opportunities in the modem market, was prevented from making sales to customers and was forced to sell at prices artificially skewed by Qualcomm," Rodgers writes.

That largely echoes Apple's own legal complaint against Qualcomm from 2017, which has since been settled. Apple had maintained that it wanted to find alternative modem suppliers but was unable to due to Qualcomm, which secured an exclusivity contract from Apple in exchange for royalty relief. "And by foreclosing competitors from dealing with Apple, a key purchaser of chipsets, Qualcomm facilitated the marginalization and exit of many of those competitors, enhancing its own monopoly power," the Mac maker had noted in what could now be considered foreshadowing with the benefit of hindsight.

Intel had invested "billions of dollars" in developing smartphone modem technology over the past 10 years, which also included two acquisitions. The company was eventually able to score a design win in Apple's iPhones, becoming the exclusive modem supplier in 2018 amid Apple's legal war with Qualcomm. Intel is currently the supplier of modems for the new iPhone 11 lineup, but Qualcomm is set to provide 5G modems for 2020 as part of its settlement with Apple.

"Intel has exited [the premium modem-chip] market, just like many other manufacturers that tried to contest Qualcomm's dominance over many years," Intel writes in its brief. "Intel offers its experience in the marketplace to help this Court understand how Qualcomm destroys competition and maintains its power over modem chips."

"In July 2019, Intel sold most of its modem business to Apple at a multi-billion dollar loss," according to Intel. Chipzilla had been investing as much as $4 billion per year on mobile research and development, while the mobile business lost an estimated $16 billion between 2011 and 2018, according to Strategy Analytics.

Qualcomm can't pay to make this one go away

The FTC case is significant because the court is seeking to upend Qualcomm's business by dismantling its arsenal of anti-competitive practices, key among them its "no license, no chips" policy that tied chip supply to inking patent licensing agreements. Other regulators around the world have found Qualcomm guilty of violating antitrust laws, but in those cases, Qualcomm has only been hit with mere monetary penalties while being able to continue engaging in anti-competitive conduct. Qualcomm can't simply pay to make this one go away.

"The world benefits from fair competition in the wireless technology market," Rodgers writes. "Given the importance of wireless technology to the future of connected computing, including the revolutionary promise of 5G, we strongly support the efforts of the FTC and other law enforcement agencies to require Qualcomm to obey the laws and compete on a level playing field."

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends Intel and recommends the following options: short January 2020 $50 calls on Intel. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.