Apple vs. Qualcomm – Black Magic pt. III

This fight is becoming less important.

• Apple is having another go at removing Qualcomm entirely from its products, but I suspect that this will continue to be much harder than expected meaning more revenues and profits for Qualcomm but by the time Apple does finally succeed, it will matter far less than it does today.
• The Apple and Qualcomm dispute goes back many years and is almost identical to the fight that Nokia and Qualcomm had over patent royalties nearly twenty years ago.
• While I have always thought that Nokia got the better of Qualcomm the first time around, this time it was clear that Qualcomm won a crushing victory against Apple in 2019.
• This was because Apple decided that the iPhone needed a type of 5G that only Qualcomm could make and as the time for launch came around, Apple was forced to settle to get access to the modems that it needed.
• It seems that no one can bear a grudge quite like Apple and ever since that day it has been determined to rid itself of Qualcomm silicon which would give it the ability to reignite legal hostilities over royalties without putting the iPhone business at risk.
• Apple subsequently acquired the modem business from Intel and has been trying to make its own 5G modem over since even though it probably makes almost no economic sense to do so.
• The original plan was to have working silicon to remove all of Qualcomm’s chips by 2024, but Apple is a long way short of this target.
• The problem is relatively simple in that the cellular radios are very difficult to make and take years of practice to perfect which Qualcomm has pretty much been doing since 1985 when it was founded as Quality Communications.
• The general assumption on the street is that because Apple is arguably the best processor maker in the world, it should have no trouble replicating the chips that control cellular communication.
• Anyone who has been around for a while understands that when it comes to cellular radios simply being good at designing chips is not nearly enough.
• Dealing with analogue radio systems, moving standards and a dizzying array of different radio frequencies is fiendishly difficult where often experience is more important than raw engineering talent.
• This is what Apple failed to understand when it acquired the second-rate radio modem business from Intel in 2019 which originally came from Infineon and had been floundering for years.
• Solving these kinds of problems is often referred to as a black art and Apple has struggled with this part ever since.
• However, it looks like Apple will finally launch an entry-level iPhone (economically insignificant) with its own silicon in 2025 and if it works well, the plan will be to slowly replace Qualcomm like it replaced Intel (see here)
• This assumes that Apple suddenly gets good at wireless communications, but the issue here is that this is a moving target as the standards continually evolve and Apple is not a meaningful contributor to any of the committees that select the IP that is used in the standards.
• This means that it has to follow where everyone else goes which will make it very difficult for it to be a leader.
• Hence, I think that for as long as the standards continually migrate and change (6G is on the horizon), Apple will not be able to replace Qualcomm in its highest-end products which will need to have the latest radios with the best performance.
• Furthermore, even if I am wrong, by the time Apple can match Qualcomm, the non-smartphone businesses will probably have become big enough that the loss of Apple’s modem business is a small blip that doesn’t meaningfully move the needle.
• The problem is that the market is obsessed with Qualcomm’s Apple business even as it becomes less and less significant meaning that every time stories like this emerge, the shares take a hit.
• Wobbles like these look like opportunities to add or initiate a position in the shares I have already done and remain happy to sit on.