Is Apple Inc. Dropping Qualcomm Inc. Chips From 2018 iPhones, iPads?

Apple Inc. (NASDAQ:AAPL) and Qualcomm Inc. (NASDAQ:QCOM) remain locked in a legal battle, and the situation appears to be deteriorating. A report in this morning’s Wall Street Journal says Apple is now designing prototypes for next year’s new iPhones and iPads that ditch the Qualcomm modem altogether.

Is Apple Inc. Dropping Qualcomm Inc. Chips From 2018 iPhones, iPads?
Source: Apple

While such a move may cause some inconveniences for Apple, losing the iPhone modem contract altogether would be a real problem for Qualcomm, with huge downside for QCOM stock.

Apple Designing iPhones and iPads Without Qualcomm Modem?

Apple and Qualcomm have been engaged in a messy fight over royalties on patents held by Qualcomm. Apple’s position is Qualcomm is overcharging for royalties on essential patents, and double-charging on its iPhone modem — once for the component itself, and a second time as a licensing fee. The battle has been ugly, with billion-dollar suits and countersuits throughout 2017, amid regulatory investigation of Qualcomm’s practices. Throughout the battle, QCOM stock has slumped. Despite recent improvement, it’s still down over 16% from the start of the year.

The battle appears to be entering a new phase and it is not going to help the QCOM stock situation.

This morning, the Wall Street Journal reported that Apple is currently designing its 2018 iPhone and iPad prototypes without a Qualcomm modem. Instead, next year’s mobile products would be equipped with modems from Intel Corporation (NASDAQ:INTC), or possibly Mediatek Inc (OTCMKTS:MDTKF).

According to the Wall Street Journal, Qualcomm says it has fully tested and released its next generation iPhone modem to Apple and it is “committed to supporting Apple’s new devices.” However, the paper’s sources claim Qualcomm has withheld software Apple needs in order to test these new chips in its prototype devices. As a result, Apple has gone ahead with designs that eliminate the Qualcomm iPhone modem altogether in favor of an Intel modem — with the possibility of adding Mediatek to the mix.

Not Good News for QCOM Stock

Losing the iPhone modem business altogether would be a blow to Qualcomm that would be reflected in QCOM stock prices. The Wall Street Journal notes that 20% of the company’s chip sales last year –$3.2 billion– were to Apple. In addition, nearly 30% of QCOM earnings last year were a result of $2.8 billion in royalties paid by Apple.

Risks to Apple

While Qualcomm has the most to lose in the battle, Apple would also have issues to deal with. The biggest concern would be the performance of its iPhone modem. Last year, Apple began to use an Intel modem in some iPhone 7 models. After user complaints about performance, independent testing showed that iPhone modems from Intel could be as much as 30% slower than the Qualcomm modem when used with a weak cellular signal.

And while the Qualcomm modem used in this year’s iPhones is capable of supporting gigabit LTE speeds, the Intel iPhone modem is not. That forced Apple to turn off gigabit LTE on the Qualcomm-supplied iPhone modem. That’s not an issue at the moment — U.S. carriers don’t yet offer gigabit LTE — but Qualcomm is also the industry leader in next generation 5G wireless technology. Current Intel modems don’t support all U.S. cellular networks, which is why Apple designates Intel-equipped iPhones for specific carriers.

Dumping QCOM means the possibility of other smartphone competitors ending up with technologically superior components.

Intel has never produced modems in the sort of quantity that Qualcomm does. Adding Mediatek to the mix reduces supply constraint risks for Apple, while using two iPhone modem suppliers also gives the company some leverage when negotiating prices.

No Turning Back?

Apple dumping Qualcomm altogether for the next iPhone modem is not a done deal. Yearly iPhone production won’t ramp up until late next summer and the Wall Street Journal points out that Apple could move to support a Qualcomm iPhone modem as late as next June. However, that would require one of the two sides to blink. And they have shown no sign of doing so. Unless that happens, the likelihood of a QCOM stock recovery seems slim. In the meantime, Apple seems to be moving forward on a future without Qualcomm as a partner.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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