iPhone 16e – Pugilistic Intent

New modem needs to succeed to re-open hostilities.

• Apple has finally launched a phone that uses its own in-house 5G modem, but the real test of success will be whether anyone can tell the difference between the in-house version and the Qualcomm modem that is used in all of the other iPhone 16 models.
• If the new modem works well, then the way will be open for Apple to restart its patent fight with Qualcomm but if Apple decides it needs 6G early, then it will be back to square one.
• The new iPhone 16e is everything that one would expect making hardware compromises here and there to ensure that Apple can still earn an excellent gross margin on a $599 price point.
• One camera, a smaller screen and no dynamic island are compensated for with stellar battery life, efficiency and the A18 chip which is present in its big brother.
• This means that almost all of the software features of iOS18 will work just as well on the 16e including all the features of Apple Intelligence.
• Hence, Apple is really pushing the battery life with a claim of 16 hours of video playback and up to 12 hours more battery life than older iPhones.
• Here, the comparison is being made against iPhones 11, 12, SE (2^nd Gen), SE (3^rd Gen) and the 12 mini highlighting that Apple is mainly going after the users of older iPhones who are more cost-conscious.
• It does not compare particularly favourably with Android as at this price point, users get a lot more hardware bang for the buck.
• Instead, Apple is trying to make up the gap with software (which for older iPhone users it does) but against Android users, I think it will struggle.
• The real test here is the in-house C1 modem which finally makes it to market after many years of trying.
• This means that Apple thinks that it has worked out how to make a 5G modem that works just as well as Qualcomm or MediaTek when it comes to 5G, but no amount of band analysis, lab testing or specification comparison will determine whether it is good enough.
• The acid test will be whether users notice any difference in connectivity compared to other devices that use Qualcomm or MediaTek modems because it is this that will determine whether the C1 and its successors can replace Qualcomm entirely.
• The place where this will be noticed will be where there is poor coverage or network congestion as there is nothing more frustrating than seeing your device fail to operate when everyone else is continuing as normal.
• In many ways, the iPhone16e is an experiment to see whether the C1 modem is ready to roll out across the rest of the range and if it is, then Apple will be free to restart legal hostilities over the patent royalties that it pays to Qualcomm via its contract manufacturer.
• Apple gave up its fight against Qualcomm over patent royalties in 2019 because it needed a working 5G modem and at the time had nowhere else from which to source one (see here).
• It also signed a relatively short patent agreement (usually 10 years) as it thought that it would have a working modem by the end of that agreement and be in a position to reopen patent hostilities.
• However, the 5G modem proved much harder than expected with several false starts meaning that it is only now that Apple thinks that it is in a position to compete with Qualcomm on modem quality.
• If this is successful, then I do not doubt that it will roll the C1 and successors quickly through its portfolio and refuse to sign a new patent licence when the current one expires in March 2027.
• This will set the stage for yet another fight over royalties but by then 6G will be starting to make an appearance.
• Crucial to the patent fight will be whether Apple decides that early access to 6G is important for its device portfolio.
• I am pretty sure that when it comes to 6G, Qualcomm will be the first to produce a commercially viable modem (as it has in every generation since 3G) and so if Apple decides it needs 6G early, it will again have nowhere else to go.
• Hence a decision to go with 6G early or the users noticing that the iPhone16e has inferior connectivity in difficult wireless environments could scupper Apple’s desire to have another go at paying lower royalty rates to Qualcomm.
• Either way, it is still much too early to know how this will pan out, but Qualcomm is already planning for a fall in modem share from 100% today to just 20% of the models that are launched in 2026 and it has communicated this clearly to the market.
• Hence, I think that Qualcomm is taking the sensible approach of planning for the worst but hoping for the best meaning that the balance of probability is that it does better than it has assumed.
• However, the real question is whether Apple will be in a position to re-open its patent fight and it is the performance of the iPhone 16e that it is likely to decide the matter.
• With relatively conservative long-term guidance and increasing penetration of new markets such as laptops and vehicles, I don’t think that this is going to trouble Qualcomm’s fundamentals too much.
• Hence, I am quite happy to continue holding the shares.