Apple's new modem business

Apple’s New Modem Business Could Become a Giant Money Pit

In Technology News by Daniel NewmanLeave a Comment

Apple's new modem business

Apple’s $1 billion deal for Intel’s modem business has brought a flurry of speculation that this will expedite the company’s entry and competitiveness in 5G.

While it’s no secret that Apple AAPL, -3.87% wants to put its own modems into its devices, those pundits who say this is a surefire winner couldn’t be further from correct. In fact, Apple’s desire to build its own modems may wind up being a money pit littered with land mines, a steep learning curve and insurmountable challenges that could deepen its iPhone woes if executives aren’t careful.

The iPhone business is already seeing increased competition from Samsung and Huawei, which grew 8% and 6%, respectively in the second quarter from a year earlier, according to Canalys, while iPhone sales fell by 13% during that period and the company’s margins decreased 1.4%. This begs a question of whether building modem technology in-house is a better investment than continuing to partner with Qualcomm to more quickly achieve parity with the competition, which has already delivered 5G devices.

A few thoughts on why Apple’s decision to go into the 5G modem business will likely be more harmful to the company and investors than it will be beneficial:

Apple is starting from behind. It took Huawei and Samsung eight to 10 years to build a modem that is competitive with Qualcomm QCOM, -2.11%. This acquisition will shorten Apple’s timeline to some extent, but Apple lacks the infrastructure experience and products that both of those companies have. Intel’s modem was significantly behind the competition, and it was struggling in related areas, such as expected battery life and performance in higher bands, in particular the mmWave spectrum, where 5G’s ultra-fast data lives.

Read: Therese Poletti says Qualcomm is among biggest victims of the Huawei fight

Intel’s modem business was a financial wasteland. The last time Intel INTC, -3.42% shared financial results from its modem unit was in 2014 — and it was a $4 billion loss. If the bottom line had considerably improved, you can bet it would have been disclosed. Now Apple will likely need to spend more than Qualcomm’s nearly $6B R&D budget to possibly catch up with the market leader. To put that in context, $6 billion is about 10% of last year’s profit. And Apple will still have to pay Qualcomm for certain intellectual property, even on Apple modems.

Apple will have to pay the costs of continuous upgrades. Apple also will have to take on the work that Intel and Qualcomm dealt with around continued modem improvement. The performance enhancements that Qualcomm and Huawei will roll out each year and make available to Android users will be an expensive engineering challenge for Apple to compete with on its own.

Apple lacks deep knowledge of the 5G standards. Apple has not actively participated in the 5G standard or the standards that came before. While it has implemented these standards, there are many nuances in features and details to understand how the next advances will work. This will cause Apple to take longer to implement both the new standards and subsequent changes. This knowledge won’t inherently come through the acquisition and the talent coming in with it.

Apple also lacks wireless experience in Baseband and RF. 5G isn’t just about modems, but about a complete system. The acquisition will help it with tuning the operating system to the silicon, but a big part of making 5G work is in the radio frequency (RF) and baseband expertise, which are important in dealing with 5G’s larger spectrum. This was part of the challenge facing Intel. Apple will have to rapidly gain or acquire this challenging skillset to be able to make the complete 5G system work or find itself in the same situation.

Read: The iPhone just did something it hasn’t done in nearly 7 years, and it isn’t good for Apple

Interoperability is a final challenge. Qualcomm has been handling Apple’s interoperability testing, which makes sure that the systems on a chip (SoC) are certified for the various networks around the world. Now Apple will have to do it on its own. The company doesn’t have the long history of data from measuring all these wireless environments so it can fix issues and refine algorithms to optimize performance. Of note, Apple likely does not have access to Qualcomm’s source code, which Apple used to optimize both Intel and Qualcomm modems for performance and battery life.

There is just so much more to taking 5G in-house than most investors realize. While Apple has been successful with simpler silicon technologies like processors and graphics, designing, building and optimizing its own 5G modem + RF solution will be challenging and expensive. And it must make this investment while market share, gross margins and iPhone revenue are all shrinking. If device innovation stalls along with unit sales, this may prove to be an earnings killer for Apple.

I believe Apple would have been smarter to invest money elsewhere. After all, Intel, a company far more experienced in developing and designing chips, exited the business for a reason. They couldn’t make it successful at the speed of mobile technology. What’s to say Apple is going to do any better?

Now read: Cold feet? 7 reasons to buy Apple stock now

The original version of this article was first published on MarketWatch.

Image Credit: Everett Collection

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. From Big Data to IoT to Cloud Computing, Newman makes the connections between business, people and tech that are required for companies to benefit most from their technology projects, which leads to his ideas regularly being cited in CIO.Com, CIO Review and hundreds of other sites across the world. A 5x Best Selling Author including his most recent “Building Dragons: Digital Transformation in the Experience Economy,” Daniel is also a Forbes, Entrepreneur and Huffington Post Contributor. MBA and Graduate Adjunct Professor, Daniel Newman is a Chicago Native and his speaking takes him around the world each year as he shares his vision of the role technology will play in our future.

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