In a recent article published in the EETimes, Will Strauss, a well-respected wireless technology analyst, said he believed that Apple (NASDAQ:AAPL) will "eventually be designing their own multimode LTE modem." He cites the fact that Apple has hired "lots of wireless talent" as the reason for his suspicions.
The idea that Apple is building its own modem isn't new, but the fact that such a well-respected (and connected) industry analyst thinks Apple is likely to do so lends that notion a lot of credence. And from a strategic perspective, it's starting to make a whole lot of sense for Apple to roll on its own.
Why this makes sense
Apple currently buys standalone modems from Qualcomm (NASDAQ:QCOM), and rumors suggest that Intel (NASDAQ:INTC) will be coming on as a second source in 2016 -- although take this claim with a grain of salt.
One oft-cited reason for Apple to potentially build its own cellular chips is to save money, but given how expensive modem and RF chip development is, I'm not convinced that cost savings would be the primary motivation. In fact, I think the reasons for Apple to build its own wireless solutions are more strategic than cost-related.
Some of Apple's key smartphone competition, such as Samsung (NASDAQOTH:SSNLF) and Huawei, have in-house modem solutions. As the world's most profitable smartphone vendor, it might make sense for Apple to have more direct control over one of the most critical pieces of technology that goes into its moneymaking iPhone product line.
Further, it's well known that the integration of the baseband with the applications processor -- which is realistic only when the chip designer can implement both the modem and the applications processor -- can lead to cost and power efficiency improvements.
A strategic element, too
Another element here is simply strategic. Qualcomm has been increasingly aggressive in trying to include advanced modem features even in its lower-end applications processors, which I believe is a way Qualcomm is trying to push Apple into buying higher-end modem chips.
Additionally, it's Qualcomm's way of trying to democratize (read: commoditize) the smartphone market so that device makers such as Apple capture less of the value to be had while chipmakers such as Qualcomm capture more.
If Apple is successful in cutting Qualcomm out of its supply chain in the long term, then not only could Apple potentially realize cost savings (depending on what Qualcomm charges Apple and how much funding a full modem and RF R&D pipeline costs), but it could potentially reduce Qualcomm's ability to invest in future products.
Any such transition is probably a long way off
If Apple is able to put together world-class LTE and RF solutions to reduce or eliminate its reliance on third-party modem suppliers, it probably won't be for a long time. This technology is difficult and expensive, and it takes time to build competitive technology.
Look no farther than Qualcomm's long list of fallen baseband foes for evidence of that. For instance, Broadcom bailed on baseboards last year, and NVIDIA has effectively given up also as it is no longer actively pursuing the smartphone market. But the big difference is that Apple has more of a vested interest in developing its own solution -- and plenty of time and money to invest in building one.
For example, five years after acquiring the Infineon Wireless assets, Intel is just now beginning to field competitive standalone LTE modems that are certified on carriers around the globe. Now, Apple makes a lot of money and has been increasing its research-and-development budget like crazy, so maybe the company has secretly built a team that has been working on this technology for years.
That said, if Apple were to transition to an "in-house" modem, I think once it had a viable baseband or RF solution in-hand, it would do what Samsung has done -- use external solutions from multiple vendors while using internal solutions in iPhones sold in a small but growing number of regions.
Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool recommends Apple, Intel, and Nvidia. The Motley Fool owns shares of Apple and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.