Apple in advanced talks to buy Intel’s 5G modem business for $1 billion
The Wall Street Journal reported late yesterday that Apple is in advanced talks to buy Intel’s abandoned smartphone modem business for $1 billion, saying that a deal encompassing patents and staff could be announced as early as next week.
Intel announced this past April it was exiting the 5G (and 4G LTE) modem chip business earlier this year after Apple reached a surprise settlement with Qualcomm that would see Apple once again return to using Qualcomm’s modems in its phones. Intel CEO Bob Swan went on to clarify that Intel had abandoned the modem chip business directly because of the Apple settlement — without Apple as a customer, the company concluded that it “just didn’t see a path” forward.
The deal would give Apple access to engineering work and talent behind Intel’s years long push to develop modem chips for 4G LTE and the crucial next generation of wireless technology known as 5G, potentially saving years of development work. Apple has been working to develop chips to further differentiate its devices as smartphone sales plateau globally, squeezing the iPhone business that has long underpinned its profit. It has hired engineers, including some from Intel, and announced plans for an office of 1,200 employees in San Diego.
For Intel’s part, a deal would allow the company to shed a business that had been weighing on its bottom line: The smartphone operation had been losing about $1 billion annually, a person familiar with its performance has said, and has generally failed to live up to expectations. Though it would exit the smartphone business, Intel plans to continue to work on 5G technology for other connected devices.
Intel and Apple have been in off- and on-again talks for about a year. They broke down around the time Apple reached a multiyear supply agreement for modems with Intel rival Qualcomm Inc., The Wall Street Journal reported in April.
Intel had cast a wider net for buyers then and received expressions of interest from a number of parties, but the talks with Apple—long seen as the most-logical buyer—soon resumed.
Neither Intel or Apple sent a delegate to the recently completed ITU-R WP5D Technology Aspects WG meeting where IMT 2020 RIT/SRIT candidate technologies were progressed.
The Apple-Intel discussions began last summer, around the time former Intel Chief Executive Brian Krzanich resigned, people familiar with the matter have said. Mr. Krzanich championed the modem business and touted 5G technology as a significant future revenue stream. When Bob Swan was named to that job in January, analysts said the odds of a deal rose because his focus on cleaning up Intel would require addressing the losses in the modem business.
Intel is the latest Apple supplier to exit a business after the iPhone maker moved to develop components in-house. Late last year, Apple agreed to a $600 million deal to acquire 300 engineers and facilities from Dialog Semiconductor PLC as the company increasingly develops the battery-management chips Dialog had supplied.
Apple has been reluctant to cut big deals in the past, preferring to acquire about 15 to 20 small companies annually that have technology it can easily integrate. But with the slowdown in its iPhone business, the company has become more open to bigger deals. It has been spending its giant cash reserves on share buybacks and dividends (AKA financial engineering). But the iconic company still has a substantial war chest, with $113 billion of cash after debt as of March 30th. Its largest deal to date remains the $3 billion acquisition of Beats Electronics LLC in 2014.
Here’s a timeline of Intel’s rocky relationship with Apple for the iPhone:
- 2007 — 2016: Qualcomm was Apple’s go-to modem provider.
- 2016 — April 2019: Apple put its arm around Intel, hoping it could offer the same chips as Qualcomm for a lower price.
- April 16, 2019: Apple begrudgingly settled lawsuits with Qualcomm, and agreed to use its chips again for at least 6 years.
- Also April 16, 2019: Since Apple broke up with it, Intel announced it was done with smartphone modems.
Key Takeaways:
After the Apple / Qualcomm deal, Intel reportedly began searching for a buyer for its modem business. Apple makes a lot of sense as a buyer. Prior to Apple and Qualcomm settling, Intel became the sole third-party modem provider for the 2018 models of the iPhone. And Apple has long been Intel’s only major customer for modems — nearly every other major Android phone relies on either Qualcomm or in-house solutions.
If Apple is able to effectively use Intel’s patents, research, and engineers into a functioning 5G chip assembly line, Qualcomm will lose the power it has over the iPhone. If not, there won’t be any competition and Qualcomm will keep charging high prices for 5G chipsets. Qualcomm is the only chip company to date that is able to offer modem chips for 5G phones, so Apple has no choice but to work with them unless it acquires Intel’s 5G modem chip business.
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As expected, Apple announced an agreement to purchase Intel’s smartphone 4G/5G modem business for $1 billion.
The move positions Apple to build its own 5G modems for its phones and other devices. That action would align with Apple’s desire to be a “vertically integrated” company that designs its own components, and also would dovetail with the company’s desire to eliminate Qualcomm as a supplier.
As part of the new transaction, roughly 2,200 Intel employees will join Apple. Employees included in this deal are in Munich, Germany (formerly Infineon); Linz, Austria (?); and San Diego CA, as well as some in Bangalore, India, and Santa Clara, CA the company said. The company will also acquire an unspecified number of Intel patents. Apple said it expects the transaction to close in the fourth quarter of 2019.
Under the deal, Intel keeps the option to develop modems for non-smartphone uses such as PCs, Internet of Things (IoT) and automotive uses. Since announcing its intent to exit the smartphone market Intel has maintained that it would focus its next generation wireless research, known as 5G, on other devices and infrastructure.
“This agreement enables us to focus on developing technology for the 5G network while retaining critical intellectual property and modem technology that our team has created,” said Intel CEO Bob Swan in a written statement. The news came as the company announced its second quarter earnings.
Apple clearly is positioning itself to replace Qualcomm’s chips with its own chips, based on Intel’s designs. The only real question is when Apple might replace Qualcomm’s chips with its own chips. Given that the chipset supply agreement between Qualcomm and Apple is described as a “multiyear” deal, it’s reasonable to assume that move won’t happen in the near term. Apple is widely expected to release its first 5G iPhone next year, likely powered by Qualcomm’s chips.
Taiwan chip company Mediatek makes progress on 5G System on a Chip (SoC), CitiCorp
Mediatek’s 5G SoC is sampling out to customers in 3Q19. It is expected to start mass production using TSMC’s 7nm technolgy from 1Q20. While it seems the top three smartphone makers are adopting captive chipsets for their 5G smartphones, the accelerating 5G adoption from other smartphone makers benefits the first wave merchandize 5G chipset makers such as Mediatek. Mediatek may see enhanced competition from Qualcomm (QCOM) on 5G.
However, the business nature of 5G with a higher ASP and a likely better GPM (Gross Processing Margin) should bode well for Mediatek’s smartphone business in 5G in 2020 and onward. In addition to its first 5G SoC, Mediatek has more SoC products in the pipeline to address different market segments for 5G products. The next 5G SoC will be available in the market in 1H20.