A Seat at the 5G Table

Apple to buy Intel’s modem business; more acquisitions to come

Apple has confirmed that it will buy Intel’s modem business in a deal valued at $1 billion. This is by no means a surprise. It follows Apple’s legal settlement with Qualcomm and agreement of a six-year licensing deal, estimated by Qualcomm to be worth between $4.5 billion and $4.7 billion in revenue when it reports earnings for its fiscal 3Q19 on 31 July (see Instant Insight: Apple and Qualcomm Settle, Intel Exits 5G Modem Development).

However, the settlement with Qualcomm will only have concentrated Apple’s determination to become self-sufficient in modem technology. The company has shown that scale, a huge cash position and appetite for long-term investment in the supply chain puts it in a uniquely strong position when it applies these advantages to technology development. Its investment in silicon to date has paid dividends in terms of the performance and differentiation of Apple’s iOS devices.

In this sense, it’s natural that Apple would want to take control of a technology that’s so central to the experience of the iPhone and incurs a high cost in component sourcing and technology licensing. This is nothing new. Apple has been slowly assembling the assets to develop its own modems for years, echoing the approach it has taken with CPUs and graphics processing units, displacing a host of suppliers in the process.

But modem development is very different to Apple’s efforts in silicon to date. It’s hugely capital intensive, needing years of investment in R&D, a vast engineering capability and a healthy portfolio of intellectual property. This burden, coupled with intense competition and therefore low margins, has seen a steady increase in consolidation in recent years. The fact that Intel bought Infineon’s wireless solutions business for $1.4 billion in 2010 and sold it for just over $1 billion in 2019 is testament to the intensity of market conditions and the significant drain on R&D. With 5G networks requiring even broader capability to manage incrementally greater complexity, the timing of Apple’s announcement is no coincidence.

Against this backdrop, Apple’s motivation for buying Intel’s modem business boils down to two factors: people and intellectual property. Apple has been making serious investment in engineering talent and has opened an office in San Diego — Qualcomm’s backyard — but its engineering capability would be significantly boosted by the addition of Intel’s employees. Moreover, those employees know Apple and its requirements intimately, having worked with the company as Intel’s only major modem customer.

Arguably even more important is intellectual property, particularly given Qualcomm’s strength. Had Apple failed to agree a deal, it would be taking a gamble on the eventual owner of Intel’s modem intellectual property. With this secured, Apple has a far stronger negotiating position with other 4G and 5G stakeholders.

For a long time, Apple was a looming but nascent force in connectivity. The hard work has barely started and there are already grossly unrealistic claims of Apple displacing Qualcomm as early as 2021. Intel’s modem business gives Apple some vital steps up the ladder, but it’s by no means enough. Radio-frequency front end technologies are critical to managing the complexity of 5G, so it’s likely that further acquisitions are in the pipeline, with Qorvo or Skyworks possible candidates. Nonetheless, Apple now has intellectual property to complement engineering resource, and that buys it a more prominent seat at the 5G table.