A few weeks back, we wrote about what Apple may be doing in the modem space. In that piece we noted that building modems is becoming an increasingly important source of differentiation for handset vendors, but we were a bit less certain about Apple wanting to go down this path for a variety of reasons. However, last week Reuters reported that Apple has moved its modem team from the Operations Group to its Chip Design team. This almost certainly signals that Apple is going to build its own chip.
Some background. Modems are the key chip for smartphones, they handle communications between the phone and the cell networks. More, Apple’s Ops team is responsible
for beating up vendors for sourcing components from suppliers. As we pointed out in our last piece, it always made sense that Apple was hiring a few modem engineers for this team as a way to get the most out of its suppliers. By moving to the chip design group, it seems that Apple wants to build an actual chip.
Coupled with Apple’s plan to build a 1,000 person campus in San Diego, right in modem-leader Qualcomm’s backyard, they are now well positioned for a serious modem effort.
That all being said, there are a few ways to read this.
First, the fact that the modem team is just now moving likely means that their modem effort is still fairly nascent. There is a lot of work to be done here, especially in building out support for older wireless standards. Any modem today has to support all the existing cellular standards going back to 2G GSM/GPRS/EDGE. That is a time-consuming process. Moreover, to be competitive, Apple’s modem will have to build 5G capabilities. If they are starting from scratch, it is hard to see them finishing all of that in less than a year, even at an incredible sprint. Admittedly, Apple is always full of surprises, so they probably have some clever shortcut that escapes us mere mortals, but even still, it is pretty unlikely that next year’s (2020) iPhone would have an Apple modem.
Second, this is bad news for Intel who is currently the sole source supplier for iPhone modems. Apple has been long rumored to be working on its own laptop CPU to replace Intel, and now it seems Apple is also designing out the Intel modem. We suspect that Intel will still provide something to Apple’s modem, perhaps some form of IP license or sale of software libraries to speed up the development. There is also an outside chance that Apple just buys Intel’s modem team. We have no idea if this is happening, but it would certainly speed up the hiring for Apple’s modem team.
Third, there is a possibility that this is an Apple head fake of some sort. Why did this story leak now and who leaked it? Reuters only cites “two people familiar with the move”. This does not sound like an Apple employee. The author, Stephen Nellis, covers Apple and Qualcomm, and seems to have a pretty broad contact network. So one scenario is that Apple directly leaked this story, probably as a way of ratcheting up the pressure on Qualcomm, any means necessary for World War Patents. Another scenario is that Apple’s modem team has gotten big enough that keeping it secret is just not possible anymore.
However that game of multi-dimensional chess works out, it now seems pretty likely that Apple will eventually have its own modem. In most situations we think that companies building their own modems is a very mixed strategy. These products do not work as well as the merchant solutions, and tend to consume more resources than companies are comfortable with over the long-term. But this is Apple we are talking about, they have a pretty good track record of following unorthodox strategies, and have the ability to fully fund the effort.