Late last week Venture Beat reported that “Intel has 1,000 people working on chips for the iPhone.” This prompted a bunch of inbound e-mails and a Twitter conversation. After a few back-and-forths, I realized that I was never going to express what I wanted in 140 characters, and so here we are with a blog post. To put it concisely, of course Intel has 1,000 people working on chips for the iPhone. I would not be surprised if they had many more. The article mentions some interesting tidbits, but there is nothing is really new going on, and I think it is hard to make big calls on Intel’s strategy based on the simple fact that Intel has a project to build LTE modems.
First, let me be clear on something. Everything I am writing here is based on press accounts, publicly available materials and brokerage reports, plus a dose of common industry practice. I have no inside knowledge of what is going on between the two most secretive companies in the country. All of this is outside information.
Intel bought the wireless business out of Infineon in 2011. Prior to that Infineon had a good wireless business. They probably made the best radios (i.e. transceivers) on the market, and had very good modems as well. They had both of those chips in the original iPhone versions. However, the modem business is incredibly competitive. And that wireless business required more resources than Infineon could provide. Intel has plowed a lot of money into the business since the acquisition since then, and Infineon probably could never have afforded it. Intel bought that wireless business and set the team to keep doing what they had already been doing. If they have a 1,000 people working on mobile chips, they probably had the same number last year and the year before. This is Intel investing in a wireless strategy.
Second, competing in the modem or baseband business is punishing. It requires billions of dollars of investment every year just to keep up. In addition to all the demands of a typical semiconductor design process, wireless products for cellphones have to keep up with the mobile standards – namely 3G, 3.5G, 4G (or to be precise GSM/GPRS/EDGE, CDMA, UMTS, HSPA, LTE, etc.) Those standards keep moving forward, and chip suppliers have to be constantly investing in software teams to keep up to date. This process got worse in the transition from 2G to 3G, and even more intense in the transition from 3G to 4G. Today, there are effectively four vendors of ‘merchant’ silicon, that is basebands which are for sale to external buyers, plus two internal efforts at two large handset vendors (Samsung and Huawei). Ten years ago, there were at least a dozen merchant vendors. So the technology has gotten much more complex, the R&D demands have gone way up and consequently the industry has consolidated.
To make matters worse, the customer landscape has altered dramatically. I touched on this subject last week, and called the industry contorted. There is Apple at the high end, and they are essentially the only profitable handset vendor out there. There are a shrinking number of global brands like Samsung, Huawei, Sony and HTC. Most of these are struggling as they are stuck between Apple’s dominance at the top of the pyramid and then a sea of low-cost companies coming out of China.
Intel has said they want to be competitive in mobile. They have been backing that up with literally billions of dollars of subsidies and marketing support for their customers. The trick is who will buy their products. Going after the low-end is incredibly difficult. Mediatek and Spreadtrum have huge teams of engineers supporting the China handset makers, in a ruthlessly price-sensitive market. Intel could go after the global brands like HTC or Sony. While I have not done the math, my guess is that the collective market of all of these is probably not big enough to cover the investment required. That leaves Apple as the biggest, and possibly only, opportunity. As I said in my piece last week, winning Apple is hard, but Intel has to make an effort. This is the problem that all component vendors face – there is really one sizable customer left, and that customer is aware of their position, and negotiates accordingly.
So Intel is making a bold effort. They are the best positioned company out there to win some share of the iPhone modem business, because they have the scale to maintain the investment required. The analyst and investor community generally believe that Intel has won some share of the modems for the iPhone 2016. The VB article points out that nothing is certain yet, and Intel still has to get their product to the finish line. I get the sense that most analysts believe the Intel program has been behind schedule, but seems to be very close to actually getting the chip working. Intel also passed a big hurdle earlier this year when they acquired the CDMA assets from Via of Taiwan. Any modem for the iPhone has to support the CDMA standard, which is used by about 15% – 20% of phones today. Effectively, for years only Qualcomm and Via could do this, and now Intel can (and probably Mediatek, though that is a bit murkier). So Intel is close to having a truly global LTE modem, and Apple is the natural customer for the effort.
I think this is all pretty straightforward, the trouble is making a call on Intel’s strategy from this set of ‘facts’. Intel faces a challenging world. PC sales have peaked, and while they will not go away entirely, the company’s core market is definitely getting smaller. Their investment in mobile is part of their strategy to address this. I do not think that we can draw any further conclusions than this. At least no conclusion justified by the fact that they want to win some Apple business.
Intel is also confounded by the growth of ARM processors. Put simply, this refers to a whole ecosystem of chip companies. These license certain parts of their chips from ARM and use outside fabs, or foundries, for manufacturing. By contrast, Intel is vertically integrated. They do all their own chip and processor design, then manufacture chips in their own fabs. The people at ARM argue that ecosystems always win because the diversity of suppliers allows for a much more nuanced diversification strategy. Fabless companies designing ARM-based chips can cover every niche. And if you want to be precise, the Infineon modem Intel is building is probably ARM-based. I am sympathetic to ARM’s argument, but we also have to recognize that Intel still has the best fabs out there and immense amounts of talent and resources. If you want to be abstract about it, no one can argue that Intel’s vertically integrated model is unworkable while at the same time arguing that Apple’s vertically integrated market is destined to succeed. There is no fundamental reason why vertical integration is somehow inferior, a lot depends on other factors.
In fact, I would argue that Intel has a lot of levers they can pull to win Apple as a wireless customer. They can offer a bundled deal which includes processors for the MacBook, and even cut Apple a deal to serve as their foundry for future versions of Apple’s A-Series of processors. I have no idea if any of these will ever happen, but I want to point out that this is a complex negotiation environment.
And, of course, there is Apple itself to reckon with. The post makes a big deal about the fact that Apple hired a big team of people from Infineon, but that started years ago, and that team has been using Qualcomm modems for a long time. More intriguing is the idea that Apple just wants to license the modem software from Intel and then design their own chip. That rumor has been circling for a long time. And I think it is important to remember that. Apple wants to manage their suppliers for its own ends. They now have two foundry partners to fight over iPhone share. For the past few years Apple has had little choice but to use Qualcomm for modems, so it is only natural for them to want a second source. When (if?) Intel finally gets its LTE modem working, Apple will have that second source. My guess is that Apple really does not want to design its own modems. That requires a lot of labor intensive software work to keep up with those standards mentioned above. At this point, Apple could definitely go out and hire all those people. However, it may be more efficient for them to simply push their two chip vendors to do the work and license the end-product, or just buy the cheapest silicon they can negotiate. Personally, I think Apple’s best supply-chain skill is the way it leverages the R&D resources of its vendors.
In the end, I do not know what will happen here, but the industry landscape is already pretty ugly. I think both Qualcomm and Intel are in a difficult position with regards to Apple. But then again, so is every other chip vendor.