Intel Couldn't Wait to Bail on 5G Modems

That was fast.

Mere hours after Apple (NASDAQ: AAPL) and Qualcomm (NASDAQ: QCOM) announced a surprise settlement that ended all global litigation between the two companies, Intel (NASDAQ: INTC) promptly said that it was bailing on the 5G smartphone modem business. Chipzilla said it would take a look at whether it was worth pursuing 4G and 5G modems in other product categories like PCs and Internet of Things (IoT) devices, among others, but as far as smartphone modems go, Intel is calling it quits.

Intel will still invest in its 5G network infrastructure business and will honor its existing commitments for 4G modems but is canceling its plan to launch 5G modems in 2020. "We are very excited about the opportunity in 5G and the 'cloudification' of the network, but in the smartphone modem business it has become apparent that there is no clear path to profitability and positive returns," CEO Bob Swan said in a statement.

iPhone XS lineup

Intel was the sole modem supplier for the iPhone XS. Image source: Apple.

Apple never wanted to rely on Intel

Intel's struggles with developing a competitive 5G modem have been well documented, plagued by numerous delays that threatened to derail Apple's timeline for releasing a 5G-enabled iPhone. Even Intel's 4G modems were becoming problematic for Apple, as many iPhone XS and XS Max owners quickly started to complain about LTE connectivity issues shortly after those models launched late last year.

Intel was Apple's exclusive modem supplier for the 2018 product cycle, although Apple had tried to buy modems from Qualcomm last year despite the escalating legal war. Qualcomm refused. "The strategy was to dual-source in 2018 as well," Apple COO Jeff Williams testified earlier this year in the FTC's separate antitrust suit against Qualcomm. "We were working toward doing that with Qualcomm, but in the end they would not support us or sell us chips." Intel then had to "scramble" to handle being Apple's sole supplier, according to Williams.

Apple supply chain exec Tony Blevins also testified during that trial that Apple thought about sourcing modems from MediaTek and Samsung. There were even rumors that Apple might buy modems from Huawei. The Cupertino tech giant then commenced "Project Antique," the internal code name for the effort to get a second modem supplier onboard. "The entire concept of Project Antique was to find a second supplier. No offense to [Intel] but we don't want to be single supplier with them. We wanted both Qualcomm and [Intel] in the mix," according to Blevins.

What happens now?

The question now turns to what Intel does with the remnants of its 5G operations and intellectual property. "5G continues to be a strategic priority across Intel, and our team has developed a valuable portfolio of wireless products and intellectual property," Swan said. "We are assessing our options to realize the value we have created, including the opportunities in a wide variety of data-centric platforms and devices in a 5G world."

It's an open secret that Apple is working on a 5G modem, and it's conceivable that acquiring Intel's IP could accelerate its road map. Alternatively, Apple could poach away talent -- much like it did with Imagination Technologies, its former mobile graphics IP supplier, and is currently doing with Qualcomm -- for far cheaper. Apple is rapidly expanding its presence in San Diego, where Qualcomm is headquartered and where many of Intel's mobile communications engineers are based out of.

If there's one incontrovertible takeaway from the two-year saga, it's that Apple utterly disdains doing business with Qualcomm. Unfortunately for Apple, Qualcomm has the best tech and Apple has little choice but to reconcile with Qualcomm -- at least until its own 5G modem is ready.

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Evan Niu, CFA 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: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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