Can Apple Survive a Last-Place Finish in the Race to a 5G Phone?

Samsung (NASDAQOTH: SSNLF) is going to have a field day with this one.

The Korean electronics maker has never been shy about attacking the shortcomings of Apple 's (NASDAQ: AAPL)  iPhone in its advertisements. And Apple might have a big shortcoming in the next two iterations of its flagship product.

There's "increasing potential that Apple may not be able to ship a 5G iPhone for 2020," says UBS analyst Timothy Arcuri. Samsung, meanwhile, is launching the Galaxy S10 5G in Korea on Friday.

American wireless carriers have been touting the importance of their forthcoming 5G networks, and other countries are well ahead of the U.S. in rolling them out. Verizon (NYSE: VZ) on Wednesday turned on its 5G wireless network in Chicago and Minneapolis. Verizon plans to activate 30 additional markets this year.

If Apple doesn't have a 5G-capable phone by next year, it could cost it quite a few customers.

An Apple employee demonstrating the iPhone Xs to a customer in store.

Image source: Apple.

How Apple fell to last place in the 5G race

Apple's fallout with Qualcomm (NASDAQ: QCOM) is the biggest reason the iPhone won't have 5G anytime soon. Qualcomm is the leading smartphone modem designer, and it's been able to extract a lot of value out of its chips over the last decade.

Instead of charging a flat price per chip to smartphone makers, however, Qualcomm uses a licensing model that requires manufacturers to pay a percentage of a smartphone's sales price. Since Apple exclusively sells premium smartphones at relatively high prices, it has paid a lot of money to Qualcomm .

Apple finally had enough, and it cut ties with Qualcomm. Last year's iPhones exclusively featured modems from Intel (NASDAQ: INTC) . While Intel's 4G chips are up to par with the competition, the chipmaker is well behind in 5G modem design. Intel said its 5G modems will be ready for products next year. But considering the scale Apple will require from Intel (over 200 million units per year), those modems might not be ready in time for the 2020 iPhone launch.

Samsung licenses its chips to other manufacturers, and it's Apple's largest component supplier, but Samsung probably isn't going to provide its biggest smartphone competitor the key technology it needs to compete. While the company can't explicitly say that, it can say it doesn't have the supply to meet demand for both its own phones and Apple's.

Huawei, another smartphone maker from China, also has good 5G modems. But Huawei's ties to the Chinese government, and U.S.-China relations, could make negotiations difficult for Apple. Not to mention that Huawei is one of Apple's biggest competitors.

So Apple's stuck with Intel. And there's a good chance Intel won't be ready until the 2021 iPhone launch.

The impact on Apple

Apple's iPhone unit sales have remained relatively flat over the last three years, peaking with the iPhone 6 release at the start of fiscal 2015. The slowdown is a result of the extending upgrade cycles of newer smartphones. The average iPhone user holds on to a phone for 3.4 years, according to Arcuri.

That lengthening upgrade cycle for iPhones could work in Apple's favor. Consumers remain extremely loyal to Apple's brand and have shown a willingness to hold on to their iPhones longer and longer. That means they're probably willing to wait for Apple to release a 5G iPhone if it's important to them.

In the near term, Apple will likely see a drop in iPhone sales as consumers wait or switch to another device maker with 5G capabilities. The impact on Apple's install base, however, ought to be minimal. Apple has increasingly focused on its install base as a way to grow its high-margin services revenue. Apple can grow services without selling new iPhones. It just introduced several new products for its users, some of which don't even require an Apple device .

Long term, Arcuri believes the iPhone will ultimately keep growing. A 5G-capable iPhone could ultimately produce another supercycle like the iPhone 6, where pent-up demand for a new feature (like a bigger screen or 5G) convinces tens of millions of users to upgrade their devices.

Apple will survive a last-place finish in the race to 5G, but it won't be pretty.

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Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Stocks
Referenced Symbols: AAPL , INTC , QCOM , VZ , SSNLF

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