Analyst Jim McGregor with Tirias Research, speaking to EETimes, observed that chip giant Intel (NASDAQ: INTC), whose Apple (NASDAQ: AAPL) Mac processor business is believed to be at risk, may eventually lose the business it has won inside of Apple's iPhone.
"Intel will also likely lose Apple's modem business once Apple integrates a modem into its mobile SoCs (system on a chip)," McGregor said. He also believes Apple will integrate a modem into its A-series applications processors in the 2020 time frame -- around when Apple is said to be planning to move at least some of its Macs to in-house processors.
Image source: Intel.
Let's go over the likelihood of this development as well as the potential impact it could have on Intel's business.
Apple can do it, but will they?
There are clear advantages to integrating a cellular baseband processor into the main applications processor, as McGregor expects Apple to do. Such integration means fewer components on the smartphone's logic board, which can be parlayed into better battery life (since a bigger battery can be stuffed into the phone) or lower cost.
As Apple is a premium smartphone provider and given that battery life is an important selling point, I think Apple would take the increased battery life.
Moreover, Apple could realize power efficiency gains (which would further amplify the battery life gains) from the integration of the baseband onto the main processor.
The disadvantages lie mainly in risk and development costs. Integrating an LTE modem onto the main processor would be risky, as the development of the applications processor would be critically dependent on Apple's internal modem team staying consistently on schedule. If they skip a beat, Apple's entire iPhone product cycle could be thrown off.
That risk becomes less pronounced as Apple gains experience in building cutting-edge modems, though.
Apple would also incur significant development costs as it develops the modems and gets them qualified on carriers worldwide. Right now, Apple can depend on two qualified modem providers -- Qualcomm (NASDAQ: QCOM) and Intel -- to handle that headache.
Now, Apple can afford to spend lavishly on research and development -- indeed, it does! Apple's research and development budget nearly hit $12 billion during its fiscal year 2017 (up from $10 billion in the fiscal year 2016, and just $8.1 billion in the fiscal year 2015). If Apple wants to commit the resources to building its own modems, it should be able to do so without much of an issue (as long as, of course, Apple hires the right people and the teams are well managed).
Indeed, if Apple is, in fact, aiming to replace Intel modems by 2020, it should have teams fully staffed up and be working on future modems as we speak.
Impact to Intel
If Apple does eventually move to in-house developed cellular solutions, the impact to Intel would likely be significant. Intel's modem sales to Apple appear to be in the order of $1 billion per year today, with that figure looking set to grow substantially if the rumors that Apple will be using Intel exclusively in its 2018 iPhone lineup are true.
I'd estimate the total risk to Intel's business is in the order of $2 billion. For Intel, such a loss would hurt, but it wouldn't be catastrophic. However, Intel's modem business depends almost entirely on sales of modems to Apple, and unless that dependence lessens significantly in the years ahead (something Intel is clearly trying to do), the viability of Intel's cellular modem development efforts is at severe risk.
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Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.