This Might Be the Real Reason Apple, Inc. Wants Qualcomm, Inc. Out of Its iPhones — The Motley Fool

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Beginning with the iPhone 7-series smartphones last year, Apple (NASDAQ:AAPL) started to dual-source cellular modems from both Qualcomm (NASDAQ:QCOM) and Intel (NASDAQ:INTC) after relying exclusively on Qualcomm for years.

This led to a drop in Qualcomm’s stand-alone cellular modem shipments and a new lifeline for Intel’s efforts to break into the market for cellphone chips.

Apple executive Phil Schiller standing in front of a projection of the iPhone 8 and iPhone 8 Plus.

Image source: Apple.

Intel’s modems, per third party tests, were inferior to Qualcomm’s in terms of real-world performance as well as carrier support (Intel-based iPhones don’t work on CDMA networks), but they were good enough so that the average user didn’t notice or care.

Apple continued its dual-sourcing strategy with this year’s iPhone 8, iPhone 8 Plus, and iPhone X smartphones, once again opting to use modems from Qualcomm and Intel. A recent set of reports from The Wall Street Journal and Reuters claim that Apple may design Qualcomm completely out of next year’s iPhones, something that would deal another blow to Qualcomm’s modem business and further boost Intel’s.

Though the reason that many cite for Apple potentially opting to shift away from Qualcomm is due to the ongoing intellectual property litigation between the two companies, I think there’s a bigger strategic reason that a lot of people are missing.

Qualcomm is a direct competitor

Qualcomm is widely known as the leading vendor of chips that power Android-based smartphones. Most smartphone vendors don’t have the financial wherewithal, let alone sound business justification, to build their own applications processors as Apple does. Those vendors lean heavily on Qualcomm making better applications processors, which are branded Snapdragon, to allow them to build competitive smartphones.

Much of the key functionality of a smartphone is directly dependent on the capabilities of the various technologies integrated into the applications processor. The general speed and fluidity of the user experience, the quality of the camera subsystem, battery life, and much more are directly impacted by the technologies found in these processors. Qualcomm commoditizes this technology, making it easy for virtually any smartphone vendor to gain access to some of the most advanced smartphone chip technology on earth without having to invest billions in research and development.

What I think many investors miss, though, is that Qualcomm doesn’t just sell processors and some related software to these smartphone vendors. Qualcomm often does much of the heavy lifting in terms of the phone’s design, which is how small, relatively unknown smartphone vendors can put out devices that can compete with phones put out by much larger vendors.

Additionally, Qualcomm continues to grow its portfolio of complementary smartphone platform technologies. For instance, Qualcomm is now marketing a broad range of fingerprint scanners, marketed as Snapdragon Sense ID, to smartphone vendors. Qualcomm’s portfolio of fingerprint scanners includes everything from low-end scanners that can be embedded in home buttons all the way to scanners that can be embedded directly into the display.

Beyond that, Qualcomm is also being quite vocal about its work to develop 3D sensing technology like Apple’s new TrueDepth camera technology. Once Qualcomm gets this technology off the ground, the proverbial floodgates will be open and smartphone makers hoping to copy the signature feature of Apple’s iPhone X will have an easy time doing so.

The point is this: Qualcomm is one of the key enablers of the commoditization of the technologies that Apple brings to market, which allows companies with only a fraction of Apple’s resources to go head-to-head with Apple. I suspect Apple believes that by cutting Qualcomm out as much as it reasonably can, it’ll reduce Qualcomm’s ability to invest in chip and other platform technologies that’ll ultimately be used against it in the marketplace.

Intel doesn’t enable iPhone competition

Since Intel’s only real exposure to the smartphone market is through the sale of cellular modem chips to Apple, Intel is far less of a threat to Apple’s core iPhone business than Qualcomm is.

Intel, of course, does work in the PC market to enable competitors to Apple’s Mac and, to some extent, iPad product lines, but even the combination of Apple’s Mac and iPad businesses isn’t anywhere near the size of Apple’s iPhone business. This likely makes it far more palatable for Apple to give billions of dollars’ worth of cellular modem business to Intel instead of Qualcomm.

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.

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