Apple iPhone X screen at launch event

Apple axes Qualcomm as modem supplier for 2018 iPhones

A Qualcomm executive has confirmed that Apple's next generation of iPhones is likely to exclusively use Intel modems.

Speaking on a conference call regarding Qualcomm earnings, George Davis, Qualcomm’s chief financial officer, said: “We believe Apple intends to solely use our competitor’s modems rather than our modems in its next iPhone release.”

Given the ongoing legal dispute between Apple and Qualcomm, it should come as no surprise that Apple would choose to distance itself from its rival at this time. The two companies are waging a global legal war against each other over patents and royalties.

In January 2017, Apple launched a $1bn (£760m) lawsuit, claiming Qualcomm abuses its “monopoly power” to demand high royalties from companies using its products and force chip buyers to license patents. Qualcomm responded in turn and a succession of complaints has been filed in both US and international courts, inevitably dragging in other Apple suppliers.

Prior to 2017, Apple was obliged to honour an exclusive arrangement with Qualcomm, although the latter’s modems were also technically superior to rival products at the time, such as those offered by Intel, offering faster and broader network support. Apple gradually adopted more Intel modem chips in 2017, for the GSM versions of the iPhone 7 model and up.

Losing Apple as a key client will deal Qualcomm a major financial blow, given that the iPhone is the best-selling smartphone brand in the world. Intel’s XMM7560 modem chip is already in mass production for 2018 iPhones, so it looks like the chips are down for Qualcomm - at least for now. New iPhone models are scheduled to appear in the autumn, as per Apple’s typical annual release cycle.

One potential side-effect of the Apple-Qualcomm split is that 2018 iPhones may in theory be slower than similarly spec’ced Android handsets, as Intel’s modems are currently slower than Qualcomm’s in terms of network speed.

Qualcomm remains the world’s biggest provider of mobile chips. It also created the technology for connecting phones to cellular networks and the company makes a significant portion of its revenue from licensing those inventions to hundreds of device makers, with the royalty fee based on the value of the phone, not the components. As Qualcomm owns patents related to 3G and 4G phones, any manufacturer selling a device that connects to these networks has to pay Qualcomm a licensing fee - even if they don’t use Qualcomm chips in their devices.

This is the issue at the heart of Apple’s lawsuit against Qualcomm. Given the high retail value of the latest iPhones (the top of the range iPhone X, pictured above, sells for £1,000), Apple argues that Qualcomm is “effectively taxing Apple’s innovation” and that Apple “shouldn’t have to pay them for technology breakthroughs they have nothing to do with.” Apple would prefer to pay Qualcomm a royalty fee based solely on the value of Qualcomm’s chips, not the retail value of the entire handset.

Qualcomm’s response has been that its proprietary technology also enables multimedia, imaging, GPS and other aspects of a smartphone. Without these inventions, the iPhone (and other smartphones like it) wouldn’t even be possible. Qualcomm has also claimed that Apple has been throttling the performance of its chips to negatively match that of Intel’s chips.

The legal battles continue.

Away from the trials, there were futher tribulations for Qualcomm, who confirmed that it will walk away from its planned $44 billion acquisition of Netherlands-based NXP Semiconductors, unless there are "new material developments". The company said it will pursue a stock buyback of up to $30 billion instead. This news boosted Qualcomm's share price by 6 per cent, despite Qualcomm owing NXP a $2 billion termination fee if the acquisition doesn't go through.

"We just need to provide certainty, not only to our partners and shareholders, but also to the employees as to where we're going," said Steve Mollenkopf, Qualcomm CEO, speaking about the decision to potentially abandon the merger.

The NXP deal was first announced in late 2016, but has been held up by the Chinese government for months because of the ongoing trade tariffs war with the United States. This is not the first time President Trump's actions have clashed with Qualcomm's business interests. In March 2018, in an unprecedented government move, Trump blocked Broadcom's $117 billion bid for Qualcomm, citing concerns over national security, fearing that the merger would hand China advantages in 5G technology.

The Trump administration is also considering imposing tariffs on semiconductor imports from China, which would directly hit Qualcomm and other US companies like it. Earlier this week, the Semiconductor Industry Association - a trade body of which Qualcomm is a member - attended a hearing in Washington to state its against the possible tariffs. Many US companies send their finished chips to China for assembly, testing and packaging. With the tariffs now under consideration, the companies would face having to pay tariffs on their own chips when they are shipped back to the US from China.

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