Apple's (AAPL +1.17%) dreams of making a modem in-house have been an open secret for years. The company has been hiring modem engineers for quite some time, even expanding its physical presence in San Diego, where Qualcomm (QCOM +3.22%) is based, to better poach talent from its supplier. Last year, Apple abruptly settled a two-year legal war with Qualcomm after Intel failed to deliver a competitive 5G modem for the iPhone.
In the most overt signal of its plans, Apple quickly announced that it would buy up the pieces of Intel's smartphone business for $1 billion (the deal closed in December 2019). It should come as no surprise that Apple is now hard at work developing a proprietary modem.
Image source: Apple.
It doesn't get more "core" than cellular connectivity
Bloomberg reports that Apple chip chief Johny Srouji confirmed to employees internally that the Mac maker "kicked off the development of our first internal cellular modem" in 2020. The move will enable "another key strategic transition" following the recent introduction of Apple's M1 chip, its first in-house Mac processor that displaced Intel. That transition is expected to take about two years as Apple introduces more M-series chips, which will proliferate within the Mac portfolio.
Apple has been aggressively in-sourcing the development of anything that it considers a "core technology." Few technologies are as critical to a mobile device as the cellular baseband modem, which facilitates the connections to the various cellular networks around the world. In no uncertain terms, Apple made its ambitions crystal clear earlier this year on an earnings call.
"As you know, we purchased the baseband activities from Intel," CFO Luca Maestri said. "And obviously, we want to develop that technology because we consider it's a core technology for us."
Apple is ready to ditch Qualcomm
Despite these messages, Qualcomm shares still fell yesterday on the news. The threat -- Apple represents over 10% of Qualcomm's revenue -- has become so inevitable that Qualcomm has added new language to the risk factors section of its latest annual report to warn investors.
"In December 2019, Apple acquired Intel's modem assets and is developing its own modem products using these assets," Qualcomm wrote. "Accordingly, Apple is expected to use its own modem products, rather than our products, in some (or all) of its future devices."
One more thing should be clear from the legal battle: Apple utterly loathes doing business with Qualcomm. CEO Tim Cook didn't pull any punches in criticizing Qualcomm while the two companies were actively sparring in court, alleging that Qualcomm's business practices were "illegal" and that it charges "exorbitant prices."
Apple had no choice but to relent due to the sheer strength of Qualcomm's technology portfolio, but there should be little doubt that Apple would strongly prefer to cut ties with Qualcomm once that's feasibly possible without adversely impacting the iPhone's competitiveness in the smartphone market.
