After eating Intel's mobile lunch, Apple could next devour Qualcomm's Baseband Processor business

Posted:
in iPhone edited January 2015
While rumors have long claimed that Apple has plans to replace Intel's x86 chips in Macs with its own custom ARM Application Processors, there are a series of more valuable opportunities available to Apple's internal silicon design team, each of which has the potential to replicate Apple's history of beating Intel in mobile chips.

Qualcomm Snapdragon

Apple eyes Qualcomm's Mobile Baseband

Building upon How Intel lost the mobile chip business to Apple's Ax ARM Application Processors, this article examines how Qualcomm may suffer a fate similar to Intel in mobile chips.

Rather than further alienating Intel with plans to replace the Mac's dependence on x86 chips (for fewer than 20 million computers sold every year), it would appear to make more sense for Apple to first apply its chip design team to the task of replacing Qualcomm as its supplier for the order-of-magnitude greater number of 4G baseband chips it has to buy (at a similar name-brand premium) for use in its iPhones and cellular iPads (north of 200 million per year).

Apple's iPhones (and cellular iPad models) run an iOS environment on their Ax Application Processor, but handle all mobile radio processing on a separate baseband chip (which also incorporates an ARM processor core). The two components function as self-contained computers, each running its own independent operating system and incorporating its own RAM and firmware.

Qualcomm's slice of the Apple iOS pie

According to the bill of material estimates (of unverifiable accuracy) published by IHS iSuppli, Apple's own A8X Application Processor (together with the separate M8 motion coprocessor!) ostensibly costs Apple $22 per device, while Qualcomm's MDM9625 baseband and other wireless chips cost $33 per device.

IHS iSuppli iPad Air 2 BOM


Eliminating Qualcomm by creating a custom, in-house baseband chip (or integrating the technology into its own Ax Application Processor package) wouldn't completely erase the need to include other wireless chips, but would shave off significant expense.

A similar BOM breakdown of the cellular Galaxy Note 10.1 (which uses Samsung's own Exynos chip, integrating baseband features) from the same firm claims a processor cost of just $18.80 and a wireless package of $15, less than half as much as the Qualcomm-supplied components in similarly priced iPad.

IHS iSuppli Galaxy Note BOM


IHS iSuppli consistently issues select, persuasive reports that derogatorily portray Apple's products as being priced too high compared to its own BOM estimates (rarely with any competitive context), alongside provocative, bizarrely contradictory predictions that tablets from Samsung and Microsoft would be more profitable because of lower component costs (were they actually capable of selling, of course).

That makes it difficult to take IHS estimates too seriously, but it does provide at least some supporting evidence for stating that Apple could shave billions off its annual iOS component costs by eliminating Qualcomm.

Apple targeting RF engineers

Apple started making iPhones using baseband chips from Infineon, a company Intel acquired for $1.4 billion in 2010 just before Apple moved to Qualcomm's baseband chips, starting with the Verizon iPhone 4 a few months later.

Integrating its own in-house mobile baseband technology into its iOS Ax Application Processors would not just save money but also enable Apple to push proprietary wireless advances and fuel its own economies of scale. Samsung, Intel and other chip makers are already targeting integrated baseband logic in their own mobile products.

Rumors that Apple was working to build its own Baseband Processors surfaced last April, supported by reports of Apple recruiting at least 30 mid and senior-level RF engineers from Broadcom and Qualcomm.


iPhone 5s logic board with Qualcomm baseband chipset. | Source: iFixit


Developing its own baseband technology (or licensing the necessary implementations and patents) would also allow Apple to more cheaply add 4G LTE support to its other products, such as its MacBooks, and potentially enable new mobile and wearable devices to access cellular networks, either with a persistent connection or with occasional sessions to remain updated, with flexible designs and at a cost effective component expense.

The frienemy of my frienemy is an opportunity

Meanwhile, Intel is also said to be attempting to win Apple's mobile baseband business away from Qualcomm. The mobile group that just lost another $1.1 billion in the winter quarter while failing to sell its Atom mobile processors is at this point likely to offer a very competitive bid to the only company capable of consistently selling high volumes of high end smartphones and tablets.

The success of Apple's vertical integration in developing Ax Application Processors suggests that the company isn't terribly likely to simply award Intel its business, given that Qualcomm is also facing competitive issues strong enough to warrant defending its current business with Apple. Qualcomm has a powerful patent portfolio in mobile CDMA and LTE technologies, but if anyone has the capital to license, cleanroom or sidestep those barriers, it's the richest tech company on the planet right now

As it has done in GPUs, Apple could play Qualcomm, Intel and Marvell (a third major chip supplier) back and forth to retain multiple competitive sources for baseband chips, but such a play would also maintain a supply of advanced, cost effective Baseband Processors for Apple's competitors.

In the Application Processor arena, Apple's proprietary A4 through A8 have effectively killed off Texas Instruments (which had previously been so powerful that even Intel couldn't compete with it in mobile chips) and starved every other chip supplier to the point where Google, Microsoft and Samsung have few competitive options left for their own ARM tablets and high end smartphones.

Even Qualcomm is struggling to release its new Snapdragon 810, aimed at powering Android flagships. The dearth of powerful, off the shelf ARM Application Processors has prompted Samsung and LG to develop their own supply, but they lack the reliable, premium device profits that Apple has to invest in custom vertical integration.

The fact that Samsung is already shipping baseband chips to reduce its dependance upon Qualcomm further underscores why Apple would have similar motivations. Qualcomm has a powerful patent portfolio in mobile CDMA and LTE technologies, but if anyone has the capital to license, cleanroom or sidestep those barriers, it's the richest tech company on the planet right now.

Alternatively: a way to get China to pay for IP

At the same time, Apple could also be considering a closer partnership with Qualcomm that would enable Apple to incorporate Qualcomm's baseband technology within its own Ax package.

Qualcomm currently sells its own integrated Snapdragon chips (which bundle an Application Processor with a Baseband Processor) alongside standalone baseband "MDM" components (like those now used by Apple) as "QTC," a business segment it differentiates from "QTL," the licensing of its patents and wireless implementations to other manufacturers.

Qualcomm recently noted in its report to shareholders, "certain licensees in China currently are not fully complying with their contractual obligations to report their sales of licensed products to us."

The chip maker's hardships in getting manufacturers in China to pay to license its patents mean that the most reliable way for Qualcomm to make any money in China may be to license its technology to the only western company that is having no problem selling lots of high end mobile products in that country.

Shanghai Apple Store


However, such a move might also risk Qualcomm helping Apple to obliterate the remains of any high end iOS competitors, so that once Apple does develop its own baseband technology, Qualcomm wouldn't have anyone else left to sell its own premium baseband chips, where it makes the most money.

Qualcomm's IP may get the Microsoft-Google-Samsung treatment

China is not the only place where there is growing, lawless indifference for intellectual property. That is a major threat to Qualcomm's future viability and a potential windfall for Apple, if it were to simply appropriate the smaller firm's technology.

Even outside of China, courts may decide that Qualcomm's technology isn't worth anything, much the same way that Judge Lucy Koh has perpetuated a legal quagmire that enabled Samsung to pay nothing for the iPhone patents it was found to willfully infringe, despite an ostensibly favorable verdict that granted Apple a fraction of the damages it claimed.

Nearly four years have passed since that trial began, and Samsung hasn't paid Apple anything, not even an Internet meme nickel. That case was one of the most publicly scrutinized legal arguments of the past decade, with copious evidence detailing the intentional, undeniable theft of Apple's work.

If a court like Judge Koh's (or Judge Richard Posner, who dismissed Apple's case against Google's Motorola) similarly allowed Apple four years to stomp all over Qualcomm's patent portfolio without facing any consequences whatsoever, the much smaller chip firm would see its revenues collapse and its stock price implode.

Without stock-based compensation, Qualcomm's employees would flee to Apple for jobs, just as Apple's fled to Microsoft following court actions that similarly invalidated any protection for Apple's IP in the early 1990s.

Somewhere down the line there might be a settlement reached where Apple could shrug off the case by writing a check, just as Microsoft repeatedly did after losing its late 1990's Monopoly trial, along with a series of other anticompetitive lawsuits that slowly inched through the courts, validating Microsoft's strategy of stealing now and maybe paying something later. In the patent-free world imagined by free software advocates, Apple's cash pile would enable it to incinerate everyone in its path, starting with Qualcomm

So far, Apple has agreed to license patents from many IP holders in the mobile industry, but the tireless efforts of Google and the open source community to devalue patents could likely create a scenario where the only ones who have to respect anyone else's IP are tiny players who lack the capital to withstand years of litigation, forcing them to subsequently pay whatever is demanded of them.

That won't be a problem for Apple, particularly once it decided to embark upon an IP stealing binge in the model of Microsoft, Google, and Samsung. In the patent-free world imagined by free software advocates, Apple's cash pile would enable it to incinerate everyone in its path, starting with Qualcomm, the same way Google invaded Sun's IP and looted its Java Mobile platform to create Android.

The people who are always wrong bet against Apple

It is curious that the tech media--which is so intensely skeptical of Apple's potential ability to continue selling premium gear in competition with low priced commodity boogeyman products--has never concerned itself with contemplating the precarious fragility of the IP being sold for a premium by Microsoft, Intel, Qualcomm or Nvidia, all of which are actually at extreme risk of disruption from both low end Chinese cloners and higher end alternatives by Apple.

Qualcomm faces being eaten alive on both ends, just like today's Samsung, which suddenly is no longer the supposedly unstoppable Samsung of 2013.

In the baseband market, Intel and Qualcomm are now in a similar position to where Intel found itself in 2006 in mobile processors: partner with Apple and potentially make little money, or refuse to do a deal and end up with nothing.

Both chipmakers are also eyeing the "Internet of Things," a market for ubiquitous "hypermobile" devices all needing radio baseband technology. If Apple develops its own vertical supply of in-house baseband technology, the history of mobile "taking over the world" might repeat itself, in miniature and on an even larger scale.

And once again, a revolution that was supposed to broadly benefit the benefactors of the writers of buzzword-compliant press releases could instead be dominated by the company that has demonstrated an operational excellence in building products that people actually want to buy, and are willing to pay a premium to get.

Apple is nowhere close to exerting monopoly control in the market for phones or tablets, but it is approaching a monopsony--as the sole buyer with the capital to make risky, long term and large-scale purchases--in the market for premium mobile components. That begs for vertical integration.

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After eating AMD & Nvidia's mobile lunch, Apple Inc could next devour their desktop GPU business
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Comments

  • Reply 1 of 91
    dewmedewme Posts: 2,061member
    When I saw the title of this I shrugged it off because I know that Qualcomm has quite the gauntlet of patent protection around their core IP and I cannot imagine Apple trying to do a head-on assault, much less conspire with a Chinese manufacturer/licensee to do an end around run. I just don't see Apple taking on such a challenge and alienating a major partner in the process. There are also a couple of other factors to consider. The ones that come to mind are the opportunity costs associated with funneling investment dollars on rather well defined components rather than new system features and breakthrough innovations. Apple becoming more vertically integrated would provide savings and economy of scale but at what cost? Is this even a core competency Apple needs to power the company 5-10 years down the line? Is Apple in a position to take on this technology at a leadership level and still focus on complete products and the ecosystem? At what point does Apple become over invested in just one collection of components for a small category of products and find themselves unprepared to ride the next wave of innovation where their previous investments become commodity?

    I think Apple will always seek to achieve the right balance between what they feel are core in-house competencies, capabilities, and capacities and what they feel are better served by strategic partnerships. The fact that they continue to shuttle major amounts of business to a company that stabbed them in the back (Samsung) tells you that they don't feel that they need to control every technology and component that makes up their products.
  • Reply 2 of 91
    asciiascii Posts: 5,941member
    Wow, some controversial recommendations there! Apple should stop being the good guy and just steal IP like certain other big tech giants?

    But I would question the idea that Apple should even try to make their own baseband chip (honestly or dishonestly). Those of us who have been Apple fans for a while remember past wireless problems in Macs and the iPhone 4. Also, even without that, networking is all standards anyway, so there's not really much room to get ahead.
  • Reply 3 of 91
    cnocbuicnocbui Posts: 3,613member
    So Dead Heads case rests on Apple blatantly stealing another companies IP?

    Such is fiction.
  • Reply 4 of 91
    Quote:

    Originally Posted by ascii View Post



    Wow, some controversial recommendations there! Apple should stop being the good guy and just steal IP like certain other big tech giants?



    But I would question the idea that Apple should even try to make their own baseband chip (honestly or dishonestly). Those of us who have been Apple fans for a while remember past wireless problems in Macs and the iPhone 4. Also, even without that, networking is all standards anyway, so there's not really much room to get ahead.



    Describing a scenario is not a recommendation that it "should" happen.

     

    Also: analogy, hyperbole. There is nothing flattering about the characterization of Microsoft, Google and Samsung stealing other's work. 

  • Reply 5 of 91
    asciiascii Posts: 5,941member
    Quote:

    Originally Posted by Corrections View Post

     



    Describing a scenario is not a recommendation that it "should" happen.

     

    Also: analogy, hyperbole. There is nothing flattering about the characterization of Microsoft, Google and Samsung stealing other's work. 




    Well, I certainly share your frustration that Samsung has gotten away with it to the extent they have.

  • Reply 6 of 91
    richlrichl Posts: 2,213member
    Quote:
    Originally Posted by AppleInsider View Post



    According to the bill of material estimates (of unverifiable accuracy) published by IHS iSuppli, Apple's own A8X Application Processor (together with the separate M8 motion coprocessor!) ostensibly costs Apple $22 per device, while Qualcomm's MDM9625 baseband and other wireless chips cost $33 per device.



    A similar BOM breakdown of the cellular Galaxy Note 10.1 (which uses Samsung's own Exynos chip, integrating baseband features) from the same firm claims a processor cost of just $18.80 and a wireless package of $15, less than half as much as the Qualcomm-supplied components in similarly priced iPad.

     



     

    Qualcomm sells the Rolls Royce of baseband modems. They typically include faster processors with more RAM. They support is also superior to their competitors. To compare their modems to Samsung's products on cost alone is misleading.

     

    Quote:

    Originally Posted by AppleInsider View Post

     

    In the Application Processor arena, Apple's proprietary A4 through A8 have effectively killed off Texas Instruments (which had previously been so powerful that even Intel couldn't compete with it in mobile chips) and starved every other chip supplier to the point where Google, Microsoft and Samsung have few competitive options left for their own ARM tablets and high end smartphones.




     

    TI killed TI. Their products were regularly late, often buggy and their support was terrible. Even taking Apple out of the equation, they had plenty of potential customers. Effectively losing Nokia was a big blow to TI.

     

    Quote:

    Originally Posted by AppleInsider View Post



    Even Qualcomm is struggling to release its new Snapdragon 810, aimed at powering Android flagships. The dearth of powerful, off the shelf ARM Application Processors has prompted Samsung and LG to develop their own supply, but they lack the reliable, premium device profits that Apple has to invest in custom vertical integration.

     

    Samsung have been manufacturing APs and modems for a long time. What's changed is that Samsung Semiconductor is finally giving them a discount! Believe or not but Samsung Mobile was treated as just another customer for a long time.

  • Reply 7 of 91
    MacProMacPro Posts: 18,225member
    Another fascinating read, thanks for the work.

    Is it feasible that, as with the ?Watch, perhaps iPhones may be headed for a totally integrated 100% Apple SoC design. That might explain the build up of staff in the broadband chip design department.
  • Reply 8 of 91

    I must be missing something... when did Apple beat Intel in mobile chips?

     

    Apple makes great chips and all, but "beating Intel" implies others choose A-series processors over Intel.  They don't - Apple doesn't make them available.  Samsung or Qualcomm might be beating Intel - Apple's on the sidelines.

  • Reply 9 of 91
    MacProMacPro Posts: 18,225member
    drhamad wrote: »
    I must be missing something... when did Apple beat Intel in mobile chips?

    Apple makes great chips and all, but "beating Intel" implies others choose A-series processors over Intel.  They don't - Apple doesn't make them available.  Samsung or Qualcomm might be beating Intel - Apple's on the sidelines.

    It depends if you are looking at volume or profit doesn't it?
  • Reply 10 of 91
    Quote:

     I must be missing something... when did Apple beat Intel in mobile chips?


     

    Yeah, kind of a click-bait headline, but we're here—so it worked.

     

    Quote:

     Apple makes great chips and all, but "beating Intel" implies others choose A-series processors over Intel.  They don't - Apple doesn't make them available.  Samsung or Qualcomm might be beating Intel - Apple's on the sidelines.


     

    Hell, they're not even on the sidelines. Apple isn't "eating Intel's lunch" they went shopping, bought Palo Alto Semiconductor, and made their own damn lunch!

     

    Intel clearly missed the boat on mobile, but it was a Couples Cruise and they were single. Mobile chips are a different paradigm than what Intel knows and comprehends (cf Xscale debacle). The old dog just can't learn that new trick. The irony of the Wintel duopoly is that both Microsoft and Intel are hamstrung the same way. They're smart enough to see that mobile was the future, but because they only had hammers they saw the problem as a nail when it was really a torx screw. They both "danced with the girl that brung them" for too long and while she may have been great for the waltz, she can't twerk worth a damn! 

  • Reply 11 of 91
    misamisa Posts: 827member
    ascii wrote: »
    Wow, some controversial recommendations there! Apple should stop being the good guy and just steal IP like certain other big tech giants?

    But I would question the idea that Apple should even try to make their own baseband chip (honestly or dishonestly). Those of us who have been Apple fans for a while remember past wireless problems in Macs and the iPhone 4. Also, even without that, networking is all standards anyway, so there's not really much room to get ahead.

    I think the implication is that there are not enough LTE parts vendors. Qualcomm basically owns enough patents in LTE to make it impossible to build LTE chips without licensing their patents, or straight out buying chips from them.

    Apple could, and probably should get all the licencing cheaper than buying the chips, and integrate it into the A9 or whatever they end up calling it, as that would reduce power requirements by not having power-sucking parts built on older processes. Like realistically, it is possible to stick all the chips in the iphone into a single die that would save a lot of power, and increase performance, but the need to have RAM and NAND memory as separate chips often prevents making such integration viable. They need to be separate because there are different price SKU's for different amounts of RAM or NAND. Likewise the same part gets used in more than one product (iPod,iPhone,iPad,AppleTV.)

    But on the other hand, when you don't build the part yourself, you are relying on the third party to not do stupid things, which is partly why Apple makes their own hardware. Could you imagine a world where Apple only licensed the iOS and Mac OSX? Think about how often we blame Microsoft for Windows being unstable, when most of it is the hardware or driver vendor's fault. Think about how often "Linux" users complain about new hardware not working on Linux, but they spend disproportionate amount of time getting old legacy hardware to be stable.

    At the end of the day, Apple switching or building it's own parts shouldn't be based on saving money, but improving designs (eg saving energy) so they are more reliable and more usable. If it was simply a question of cost, people wouldn't consider Apple in the first place, and they will continue to complain about the reliability of the device they cheaped out and bought instead, when that was what they had control over.
  • Reply 12 of 91
    Apple is going to have to do their own baseband chips purely for power consumption reasons. But the iPhone isn't the intended target, it's for Watch.
  • Reply 13 of 91
    Quote:
    Originally Posted by digitalclips View Post





    It depends if you are looking at volume or profit doesn't it?



    I'm not sure that either are really applicable. What's Intel really lost? The opportunity to fab chips for Apple? Granted there's money there, but it's hardly 'F-You Money', and it's definitely front-loaded with CapEx, even for an established chip manufacturer (e.g. Samsung's Austin US$ 4 BILLION foundry). So what they've lost is the chance to make mobile chips for everyone else. Well, that comes with the same CapEx requirements, but then you're stuck selling to second, and lower, tiers (remember Samsung is it's own fab). The HTCs and LGs of the world don't have Apple's pricing leverage, but they're also buying smaller quantities for lower-margin phones that aren't really profitable. Hardly the best customers to have. So basically Intel would be WalMart but faced with a much stronger K-Mart (Samsung). That's kind of a bag of hurt.

     

    Intel's definitely lost out on mobile, but in 5 years we may look back on this the same way Microsoft "lost out" on buying Yahoo! (i.e. dodging a huge bullet).

  • Reply 14 of 91
    Quote:

    Originally Posted by digitalclips View Post





    It depends if you are looking at volume or profit doesn't it?

     

     

    Not really.  Apple's success as a chip manufacturer is zero by either metric.  They're providing great chips to themselves, but they aren't making any money in the market on them.  They're just an in-house manufacturer.



    Now by quality standards, they may be a winner.  By price/unit for themselves standards, they may be a winner.  But it isn't like companies are comparing Intel v Apple and choosing Apple.  Apple's not even a choice in the marketplace.

  • Reply 15 of 91
    Quote:


     Apple could, and probably should get all the licencing cheaper than buying the chips, and integrate it into the A9 or whatever they end up calling it,


     

    That works with Standards Essential Patents where the holder is obligated to make them available under FRAND terms. With other IP you're at mercy of the holder's business model. As has been stated QC sells a high-end chip that's quite lucrative, and while it's easy to understand why Apple would want that technology to incorporate into their own designs it's also easy to see why QC would be loathe to let that go cheaply. That being said, Apple has plenty of money and a strong desire to control their own destiny. When you can afford something your really want, you tend to go get it even if it's not cheap.

  • Reply 16 of 91
    rob53rob53 Posts: 2,030member
    Quote:

    Originally Posted by Misa View Post





    I think the implication is that there are not enough LTE parts vendors. Qualcomm basically owns enough patents in LTE to make it impossible to build LTE chips without licensing their patents, or straight out buying chips from them.

    Except of course for all those standards-essential LTE patents Ericsson is suing Apple over. Since Ericsson is suing in the anti-Apple court of East Texas, they will benefit from the corrupt judges who almost always side against Apple in IP cases.

     

    If Apple really wanted to get around Qualcomm and Ericsson's patents, it would have to develop and patent the next level of cellular technology. Even if this happened, I'm sure the Chinese and Korean companies would simply ignore the patents and copy and use whatever they want to use. It seems that only Apple (and maybe Microsoft) gets nailed for using someone else's patents.

  • Reply 17 of 91
    eriamjheriamjh Posts: 1,121member
    I have only this to say: Monop-Sony.

    That is all.
  • Reply 18 of 91
    rob53rob53 Posts: 2,030member
    Quote:

    Originally Posted by drhamad View Post

     

     

     

    Not really.  Apple's success as a chip manufacturer is zero by either metric.  They're providing great chips to themselves, but they aren't making any money in the market on them.  They're just an in-house manufacturer.



    Now by quality standards, they may be a winner.  By price/unit for themselves standards, they may be a winner.  But it isn't like companies are comparing Intel v Apple and choosing Apple.  Apple's not even a choice in the marketplace.


     

    This statement is way off base. Apple provides great chips for themselves, which constitutes a tremendous amount. They don't need to make chips for anyone else to be successful. They are making money for themselves by reducing the cost of iOS devices. Almost every other phone and tablet provider is using OTS garbage (sorry Qualcomm) that is competing for bottom end devices. Top end devices that try and compete with Apple are not making much money at all. Qualcomm and others make whatever slim profit they can by pushing out millions of junk phones. Apple makes millions in profit by pushing out full-featured great phones. Apple doesn't supply other companies computer parts because they don't want to. They manufacture (outsource component manufacturing and device assembly) what they need to sell their own products. Apple has never been a manufacturer for other companies and never will. It wouldn't make sense, just like your comments.

  • Reply 19 of 91
    Good morning, boys and girls. Today's word is "incinerate."

    Can you say, "incinerate"?

    I knew that you could... ;)
  • Reply 20 of 91
    Why so many people think that building a LTE chip would involve stealing IP I don't get. Most of the patents are available for anyone in the consortium to use and pay a flat fee. Apple will pay that fee. Many Qualcom patents are available that way.
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