Apple (NASDAQ:AAPL), for better or worse, typically likes to outsource a lot of the capital-intensive work to others. It prefers to use its pristine balance sheet and attractive business to score excellent deals from its suppliers.
From a gross-margin standpoint -- particularly given the intensifying nature of the smartphone market -- it makes perfect sense that Apple would benefit from competition among its suppliers. While Apple is able to get good deals from just about everybody in the supply chain, there is one component that can be produced only by a single-source today -- the cellular modem.
The Qualcomm LTE monopoly
Today, Qualcomm (NASDAQ:QCOM) has a monopoly on LTE baseband/transceiver chips. According to iSuppli, Apple pays $32 (out of a $199 bill of materials) for the cellular portion of the iPhone, and most of this content comes from Qualcomm.
Apple opted to use Qualcomm's MDM9x15 modem, which is a category 3 LTE modem, rather than Qualcomm's latest-and-greatest DM9x25, which is a category 4 LTE-Advanced modem. While the rationale that LTE-Advanced networks have yet to roll out in most of the world, the real reason that Apple went with the older modem is probably cost -- older-generation is cheaper.
Going forward, it is likely that Qualcomm will retain the Apple iPhone socket. A competitor would need to offer a demonstrably better solution at the same price Apple is currently paying or to undercut Qualcomm for a roughly equivalent solution. In today's market, such competition doesn't even exist, which means that Qualcomm has free rein over pricing. But this is likely to change over the next year -- much to Apple's benefit.
A former Apple supplier enters the ring
Up until the iPhone 4s, Infineon Wireless -- now Intel's (NASDAQ:INTC) Mobile and Communications Group -- supplied the cellular baseband for the GSM iPhones. Of course, as Intel/Infineon fell behind in the wireless race during the LTE transition, Apple had no choice but to go with Qualcomm as a sole supplier.
Apple dithered on the move to LTE in the iPhone 4s, and didn't do so until the iPhone 5. But it still went with a Qualcomm-only lineup, likely due to a superior 3G solution from Qualcomm as well as preparation for a Qualcomm-only LTE world.
Under Intel's wing, Infineon Wireless is now working to build competitive cellular baseband and transceiver solutions. The company's recently announced multimode LTE XMM 7160 solution is still not quite on par with Qualcomm's last-generation MDM9x15 solution, but Intel's XMM 7260 LTE-Advanced solution looks like it will be able to at least hold its own against Qualcomm's MDM9x35 LTE-Advanced chipset.
While Intel's XMM 7260 looks as though it will sport roughly the same feature-set as MDM9x35, only the Qualcomm part will support CDMA, which means that Qualcomm still has a lock on a good portion of the U.S. market, as Verizon and Sprint use CDMA for their 3G technologies.
This will pressure price, though
For this coming generation -- iPhone 6 -- Qualcomm probably won't face too much pricing pressure. But given how quickly Intel has been able to close the gap, it is not inconceivable that Qualcomm and Intel will be in a legitimate fight for the iPhone 6s cellular baseband sockets, at least as long as XMM 7260 ships in the first half of 2014 as promised.
The best-case scenario for Apple would be to see each with roughly equivalent chipsets, so that it can bargain for the best price. Qualcomm will likely want to keep the prestige of the iPhone socket at a pretty high cost, and Intel -- knowing that winning back the iPhone would be a major coup for the company -- is likely to be very fierce on pricing as well.
Foolish bottom line
This is a clear positive for Apple. It's potential negative for Qualcomm , if Intel actually executes. And it's a potential major positive for Intel, again, depending on execution.
At the end of the day, while it's hard to bet against Qualcomm's modem prowess, Intel is a larger company by revenue and profitability, and it's throwing a lot of research and development dollars into winning the mobile space. Were it a lesser competitor, this wouldn't be an issue for Qualcomm, but Intel is one to be feared, particularly given its R&D strength and manufacturing prowess.