Why does Apple have so much ‘love’ for Broadcom and so much ‘hate’ for Qualcomm? An investor asked us this question last month, and it has been worming its way around our brain ever since. After all, both companies have near monopolies on two critical components for mobile phones. Qualcomm is the leading cellular modem provider, and effectively the only one for high-end, global phones. Broadcom is the leading provider of fBar (BAW) RF filters, and effectively Apple’s only supplier for the part. Apple famously does not like to be dependent on any single supplier, but for some reason it has a good relationship with Broadcom, or at least a normally commercial one, but its relationship with Qualcomm is at best contentious and often outright hostile.
When people ask us to explain Apple’s hostility towards Qualcomm, we usually describe it as “The Immovable Object meeting the Irresistible Force”, two large companies long used to having their own way. And while this is true, the same could be said about Broadcom.
Apple’s feelings towards Qualcomm predate the iPhone. A senior iPhone executive told us on the iPhone launch day in 2007 that their whole supply philosophy for to “keep Qualcomm at arm’s length for as long as possible”. Possible proved to be over a decade. When Apple set out in the phone business they wanted to upset the status quo as much as possible. Most critically that meant breaking the mobile operators’ stranglehold on mobile software, but it also meant disrupting Qualcomm’s market position as best as they could. In de-risking their market entry Apple sought to have as much of a free hand as possible and that meant avoiding Qualcomm and all its entangling licenses. Remember the original iPhone was 2G only, many years into the 3G cycle. By contrast, at the time, Broadcom’s (then Avago’s) position in the mobile industry was one of many filter vendors. From the get-go, that relationship was one Apple was much more comfortable with. Over time’ Broadcom’s products became much more important to Apple and the iPhone, but the existing relationship had already been set with a clear master/servant dynamic. Critically, Broadcom never pushed too hard, they knew Apple needed them and would pay handsomely for their product, no need for anything more than that.
Another major wrinkle in the Apple-Qualcomm relationship is intellectual property (IP). IP sits at the heart of Qualcomm’s existence, and they are very diligent in protecting it. Apple is no slouch on that front either. Anyone who has ever done business with Apple knows that the second rule of doing business with Apple is you will need a very expensive IP lawyer, and you are very unlikely to be happy with the contract that comes out of the interaction. Both sides are so rigorous about their IP that it is easy to imagine a scenario in which the respective legal teams remain at an impasse forever. Obviously the lawsuit and subsequent capitulation by Apple served as a forcing function to remove this logjam, but we imagine the issue persists. Apple spent something like a $1 billion to keep out of any entangling relationship with Qualcomm’s IP, and given its importance to Qualcomm it is easy to see the origin of the feud that spans generations. Tellingly, when Broadcom was trying to acquire Qualcomm, a key part of their proposal was that they would exit the IP licensing business. It is hard to see Broadcom’s CEO Hock Tan ever abandoning a revenue source, and this proposal was clearly intended as a signal to Apple that he would not disrupt Broadcom’s relationship with them if the acquisition went through.
Given all this, is there any hope that this relationship will change? At this stage, Apple has had to abandon Qualcomm alternatives twice (Intel and their own modem). It is hard for us to think of a company persisting with the effort after this many, expensive setbacks. We have to imagine there are constituencies within Apple who are weary of the fight, and want to move to a normal, commercial relationship with Qualcomm. That being said, Apple is not a normal company and this is not a normal situation. The underlying contention around IP may very well prove to be insurmountable, and there likely remains a very strong cultural antipathy within Apple towards Qualcomm. From what we can tell, the team at Qualcomm just wants a normal commercial relationship, and are willing to be very flexible with offering terms to win a major customer, but there are also limits to that flexibility. For the time being, Apple is stuck with Qualcomm until they get their own modem working, but by the time that happens we will likely be on the cusp of 6G. If history is any guide here, Qualcomm has benefited greatly from every transition of the wireless standards. Each increment has seen competitors exit the market (TI with 3G, Broadcom with 4G, Intel with 5G, and many others). That pattern will weigh on Apple’s ambitions, and maybe, possibly outweigh its culture reluctance to engage with Qualcomm.
As formerly part of a supplier into a Broadcom module for Apple, I can suggest a simple motivation for hate of Qualcomm and love of Broadcom:
Qualcomm collects its outside-the-ASP tax per component from Apple. Broadcom, on the other hand, collects its outside-the-ASP tax from its module component and service suppliers.
History is usually little guide without context. Don’t Qualcomm benefits flow from its domination of standards bodies? I think the relationship between bodies such as the 3GPP to QCOM are roughly the same as the FAA to Boeing. It’s more of a rubber stamp. Of course, Apple knows this so I always thought we’d know how serious Apple was about baseband by whether or not they moved to contest QCOM’s dominance of these standards bodies, rather than just waiting for the next transition. And what do you know? The IAM reported that “3GPP members in the summer of 2022 noticed that Apple’s Individual Members almost doubled – from around 17 to 33 – in a short amount of time”, which triggered a rules change to “avoid any potential for dominant voting power by any corporate group.” For Apple to succeed they’ll need to work all aspects of the chain, and unless they’re stupid they had to know this from the start. After all, I knew and I have no knowledge or experience. I’m just a guy that reads the tech news. The idea that Apple was blindsided by the complexity/difficulty they’d encounter is a silly idea. I see no evidence they’re not in it for the long haul. I think it will pay dividends in the future if they pull it off in their differentiation. QCOM limits their differentiation, without which their future isn’t very bright. It is that simple.
If I were a fly on the wall, I’m not so sure the Intel modem story is a failure. Even Apple didn’t dare sue QCOM until they had an alternative. And though you may call the settlement a “capitulation” I’m not so sure. QCOM had a history of suing their licensees over spurious charges thrown out of court after years of legal bare knuckle brawling. Ask TI. Apple’s course wouldn’t have been any different if they’d been able to stick with Intel. I think Apple in the settlement got what the one thing they needed most, which was a direct license and insulation from injunction in the future should they develop their own modem. I think that was what the fight was all about.
But let’s say it’s as you say and this dispute is one Apple could put behind it. QCOM’s only thin modem is made for Apple. All other QCOM customers use QCOM’s SoC instead of a thin modem. How long do you think that situation will be tenable? I think it is an inherently unstable and dangerous situation. I seriously doubt Apple sees it any differently.