Last month Apple announced that it was building several new campuses. The media focus was on what appears to be the company’s major campus in Austin, but we noticed they were also building something in San Diego as well. This site got the least attention in the press, and was left out of many write-ups we read, but we noticed. This was coupled by several new job postings on Apple’s website for ‘cellular modem’ engineers’. Taken together it was enough to spark a renewed wave of speculation that Apple is building its own cellular modem. This rumor has been hovering out there for years, and we thought we would address both data points. Note, as always, we are relying on public information. We have no confidential data, this is just our putting together a few pieces of the puzzle with a dose of common sense.
First, the San Diego campus. At the outset, we should note that San Diego is a wonderful town. It has the best weather in the continental United States and all kinds of culture and incredible beaches. That being said, it is a pretty terrible place for building a Tech career. Put simply, there is only one employer there – Qualcomm. We are not disparaging Qualcomm, but it is fundamental limit of that city’s tech ambitions that having a such a large, prominent company is both a blessing and a ‘curse’. Lots of companies have offices there, but they largely exist as satellites for picking off Qualcomm employees. We learend at CES that Apple is apparently looking to staff 1,000 people in San Diego, not a small office. So who would Apple want to pick off? Qualcomm has the best pool of cellular modem engineers out there (more on modems in a moment), but it also has great wireless engineers in general. There are large pools of Bluetooth, Wi-Fi and RF engineers within the company as well. Apple needs help with all those things too, so opening an office in San Diego is not alone a signal that Apple is building its own modem.
What are these modems we keep referring to? Modems, also known as basebands, are the fundamental processing unit of a smartphone. They are what enable communication with the cellular networks. A smartphone without a modem is just an iPod Touch, reliant on Wi-Fi for nearby communications. However, there is a fundamental mis-understanding about modems. Many companies (looking at you Intel) have viewed modems as just another form of processor, like a CPU or GPU with a few add-ons. In reality, modems are more like a very complicated collection of discrete software libraries, burned into silicon. Processors in general do math, modems, on the other hand, are like recipe books that tell processors some specific math problems to solve. The key is that modems are designed to accommodate the cellular standards 2G, 3G, 4G, etc. (aka GSM, UMTS, LTE, etc.). The standards themselves map out how devices communicate with the core cellular network. How to connect to the network, how to authenticate, which base station to communicate with and crucially how to move around the network and respond to changing network connections. Examine a CPU under an electron microscope and you will find discernible, repeated patterns (like flying over an industrial farm with lots of square plots laid out). By contrast, modems look a lot less repetitive, a patchwork of different sized plots. We are oversimplifying here, but our point is that modems are a very different kind of chip.
Qualcomm’s core expertise lays in its deep, decades-long institutional knowledge of all of those blocks. At the same time, for someone else to come along and build a modem requires a very steep learning curve. Modems, in general, are difficult to build and even more difficult to maintain over the long term as the standards keep evolving. For this reason we have always discounted these rumors about Apple seeking to build its own modem. The effort and headcount involved likely outweighed the benefits.
From our experience, Apple’s real technology superpower is its ability to drive its suppliers to do the headcount-heavy parts of R&D. They offer large volumes to the suppliers who can meet the company’s R&D requirements. This is part of the reason a company like Skyworks has done so well winning RF content in the iPhone. Skyworks may not have all the best RF engineers, but they have a top-tier management and operations teams that has let them profitably respond to Apple’s R&D directives.
An anecdote to illustrate this. We know someone who has deep expertise in a specific area of phone semis. When he was at Apple his job was to fly to Asia and meet with the suppliers of that specific component. He would sit in the suppliers’ conference room and ask them detailed questions about the product they were providing. As the representative of a leading customer, the supplier would have him meet their management team. But after the first hour (or less) they would run out of answers to his questions. So they would then bring in the middle managers, and eventually the coal-face engineers who did the day to day work. Our contact would drive them all to first principles to make sure Apple was getting the part they wanted. By contrast, when that contact went to go work for a supplier, he found that every other customer would leave after the first hour with management. Apple was effectively guiding its suppliers R&D roadmaps.
So usually when we see that Apple has posted a job for someone with modem experience, our take has been that Apple just wants to make sure it has a small number of the best modem engineers. Those people are then tasked with managing and leveraging their modem suppliers. If they really wanted to build their own modem, they would have to hire hundreds of people not just the handful we see posted.
Could this have changed? Possibly. First, Apple now has a huge semis team. So maybe they could hire a few modem architects to manage an internal team that has been repurposed from other areas; and as they have been doing this for a while they may have that institutional modem knowledge already. Second, the relationship among Apple, Qualcomm and Intel is … let’s call it dynamic. A brief recap. Apple sued Qualcomm. Qualcomm countersued. The two are now engaged in a World War Lawsuits, with legal action all over the map. Qualcomm also accused Apple of giving trade secrets to Intel. The heart of the fighting is around Qualcomm’s patent licensing business, beyond scope for this piece, but suffice it to say, those licenses have a lot to do with modem technology. In production phones, Apple appears to have moved entirely to Intel modems. One crucial wrinkle is that Apple may have licensed modem software (all those recipes) from Intel and is running that software on its own A-series processor. This matters in our context because it implies that Apple is trying to move as much silicon content to its own processor design team as possible. They have done this with image processing and power management and a bunch of other areas as well, so it seems logical that they are at least considering moving the modem content as well.
Bringing this all together we think Apple is very active in modem technology. Our best guess (and remember this is all just a guess) is that Apple will eventually port a chunk of modem capability to its own processor, but we still think it is unlikely that they want to take on the burden of incorporating the entire modem standards recipe book. For instance, incorporating the repeatable bits for decoding signals while leaving alone the endless standards libraries and use cases. That last bit is messy and labor-intensive, and requires a (large) full-time team just to keep up with the evolving standards, especially with 5G now on the horizon. Ultimately, all of this depends heavily on the outcome of World War Patents. If Qualcomm and Apple find a way to settle their disputes amicably (or at least semi-amicably), then Apple can go back to leveraging Qualcomm’s R&D team to its own ends. There are plenty of other conceivable outcomes, but they will depend heavily on the outcome on the legal front. And we have no way of predicting how that will turn out. It could just be that Apple is hedging its bets, building up its modem expertise and picking off Qualcomm engineers in San Diego, to be prepared for any legal eventuality.