We are travelling in Asia this week, so we are a bit delayed in responding to the news, nonetheless it was nice to wake up this morning to the news that Qualcomm and Apple have settled their long-running legal disputes.
The headline is pretty straightforward in that Apple has signed a licnese with Qualcomm; the two companies have dropped all legal actions against each other; and Apple has signed a six-year supply agreement to buy modems from Qualcomm.
This removed a massive overhand from Qualcomm, whose stock was up 23% on the news. Certainly many buy-siders we have spoken to in the past few years were standing on the sidelines, afraid to touch Qualcomm stock because they had no way to gauge this outcome.
It is also a pretty clear victory for Qualcomm, validating their licensing model (although that FTC suit is still out there) and their public comments with regards to Apple. Apple signed a license with Qualcomm. They have sold iPhones for twelve years without one, and have finally come onboard. It will probably be possible, and certainly fun, to back out Apple’s royalty rate when Qualcomm announces its results next month. The global average for Qualcomm licensees is something like 4%, but large handset makers with lots of IP pay less, around 1%-2%. Our best guess is that Apple will be somewhere in that latter range.
The other important news is that Intel also announced they are exiting the modem business. This was not surprising (as we mentioned in our note last month), Apple was their only customer. While the decision makes sense, it is pretty staggering news. Intel has probably spent $20 billion
(at least) over the past 20 years trying to tap into this market. That is a large amount of money, a massive bet that went the wrong way.
In the press, and on Twitter, we saw a lot of speculation about cause and effect with regards to Apple and Intel. Did Intel’s exit force Apple’s hand? Or was Apple’s settlement the final straw for Intel?
Our best guess is that the latter is true. Apple was Intel’s only customer and without them there is no reason for Intel to stay in the business. We also think that Intel could not push Apple around that way. Recall Apple is still a major CPU customer for its Macs. For Intel to abandon the iPhone, they would put that business at risk as well.
From what we can tell from the outside, the likely sequence of events was as follows:
- Apple realized that Intel’s 5G modem was far behind schedule. This was clear to us at Mobile World Congress in February. So Apple must have known about it earlier in the year.
- Apple remained silent about this to strengthen (or shore up) their negotiating position with Qualcomm. They had to keep up that public stance and likely seed stories in the press to maintain the façade that they had an alternative. This may also explain why we saw so many leaks about Apple’s own modem efforts. Recall our post from February we said
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”…. 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.
3. Apple and Qualcomm reach a settlement. Apple then informs Intel. Intel cannot announce they are exiting the modem business until the settlement news breaks, again they do not want to antagonize a big customer. So Apple and Qualcomm announce and then Intel can finally throw in the towel. Note that Apple signed its license with Qualcomm on April 1, which means the two companies took two weeks to tee up the public announcement and get all parties aligned.
So overall, this was good news for Qualcomm. It shores up their market share with the largest holdout customer and re-strengthens their dominance of their licensing position. This was not great news for Apple. In hindsight it is clear their legal position was never that great. Our sense has always been that they got into this fight largely because they were used to getting their way in the industry and felt they could extend that position to modems and licenses.
However, there is one positive for them. They can now offer a “5G iPhone”. In theory, they could get this done in time for this year’s iPhone. It will be a stretch, but both teams are capable of pulling it off. For what it’s worth, at MWC there was a rumor that Apple and Qualcomm had secret teams already working on a 5G iPhone. We dismissed that at the time (and still do not give it full credence), but it could have happened.
As we noted in our piece from March, the big imperative for Apple is to have a 5G iPhone for China, where 5G is coming on strong. Apple likely realized that Qualcomm is a better long-term ally for what is a much more important challenge. By the same token, this decision now turns the spotlight for Qualcomm to China as well. Their licensing model continues to be tested by handset makers there, and this frees them up to focus on that as well.