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Intel Sells Most of Smartphone Modem Business to Apple for $1 Billion

Intel said on Thursday that it plans to sell the majority of its 5G smartphone modem business to Apple for $1 billion, washing its hands of a business that had been weighing it down. As part of the deal, around 2,200 employees from Intel will join Apple, which also agreed to acquire patents and other assets to help expand its effort to control all the major components inside its iPhone.

Once the deal is completed by the end of the year, Apple will own more than 17,000 patents related to wireless technology, including cellular communications standards and modems, which largely determine data transfer speeds in smartphones today. Intel said that as part of the deal it would still be able to make modems for other applications, including personal computers, cars and Internet of Things devices.

The deal had been a possibility since Intel backed out of the smartphone modem business in April. Intel pulled the plug shortly after Apple, which uses Intel's modems chips in its latest line of iPhones, dropped its lengthy legal battle over patent royalty rates with Qualcomm, the only other source for iPhone modem chips. Intel also announced in April that it would reassess its efforts around 4G and 5G technology.

Once it sells the smartphone modem business, Intel plans to boost its production of chips used to build base stations and other types of 5G infrastructure. "We're looking forward to putting our full effort in 5G where it most closely aligns with the needs of our global customer base, including network operators, telecommunications equipment manufacturers and cloud service providers," C.E.O. Bob Swan said in a statement.

He said on an earnings call on Thursday that Intel's 4G modem chip business would be unaffected under the deal.

Apple has been broadening its chip design capabilities over the last decade under senior vice president of hardware technologies, Johny Srouji. By building its own chips, Apple can more closely integrate the software and hardware powering its iPhone and other products, curbing power and boosting performance. Custom chip design also gives it greater control over features that differentiate its devices from those of rivals. 

Getting access to Intel's 5G technology could help jump-start Apple's push to create its own 5G modems for the iPhone. Intel's engineering team "together with our significant acquisition of innovative IP, will help expedite our development on future products and allow Apple to further differentiate moving forward," Srouji said in a statement. 5G networks are expected to be 10 to 100 times faster than current 4G LTE technology.

For the last year, Apple has been on the lookout for electronics engineers to fill jobs related to cellular modems and other radio frequency parts used in smartphones. Apple is planning to add 1,200 jobs over three years in Qualcomm’s hometown of San Diego. Apple, the No. 3 player in the global smartphone market has also hired Esin Terzioglu, who headed up modem chip engineering at Qualcomm for close to a decade.

The Intel deal is "a clear doubling down on 5G which remains at the centerpiece of the company's smartphone future," Wedbush technology analyst Dan Ives said in a research note. Other industry analysts pointed out that while Apple could have spent six to 10 years building a baseband modem from scratch, buying Intel's smartphone assets could speed up its 5G modem chip development to within three to five years.

By selling its smartphone modem assets, Intel is pulling out of a deeply unprofitable business. The Wall Street Journal reported on Monday that the smartphone modem operation had been losing about $1 billion annually. Intel's chief financial officer George Davis said on Thursday that the cost savings from the deal could total $400 million to $500 million in 2019, up from earlier estimates of $200 million to $300 million.

Intel obtained its first order to supply modems for Apple’s iPhone in 2016. The company started to gain ground in the modem market in 2017 before taking over every iPhone socket in 2018 as the hostilities between Qualcomm and Apple deepened. The legal dispute dissolved after they reached a multiyear chipset supply agreement in April. The deal opened the door for Apple to use Qualcomm’s modems in future 5G iPhones.

The deal was also the last nail in the coffin for Intel, which had been struggling to produce 5G modem chips for Apple. Intel had hoped to start shipping its 5G modem before the end of 2020, while Qualcomm started selling its second generation 5G modem in the first half of 2019. Intel halted its 5G smartphone modem development the same day Apple agreed to pay out nearly $5 billion in its April settlement with Qualcomm.

“Intel was unable to expand beyond Apple in the past three years,” said Sravan Kundojjala, senior analyst at Strategy Analytics, in an April note. Sharing iPhone orders with Qualcomm, which held nearly 50% of the baseband processor market in 2018, would have put further pressure on Intel’s financials. “With a single customer and lower volumes, Intel would not have been able to justify sustaining its 5G investments,” he said.

The move marked the end of the Santa Clara, California-based company's foray into the smartphone modem market, which it entered in 2010 with the acquisition of Infineon's cellular chipset business for $1.4 billion. Intel had long lagged behind Qualcomm, Mediatek and other players in the $21-billion modem chip market. The company's largest share of the market came to about 8% in 2018, according to Strategy Analytics.

By buying Intel's 5G technology assets, Apple is aiming to reduce its dependence on Qualcomm, which is expected to be Apple's exclusive modem supplier in 2019. By self-supplying modems, Apple could also curb costs related to component sourcing and technology licensing, which is what drove the wedge between Apple and Qualcomm in 2017. Apple is expected to use Qualcomm's X55 modem in the iPhone in 2020.

"Apple owns the operating system and it owns the SoC, so why shouldn’t it also own the modem?" said Anshel Sag, analyst at Moor Insights and Strategy, in a blog post. "Apple loves to do things in-house and if it can, it will." The other potential benefit of buying Intel’s modem business is the ability for Apple to integrate 5G into its A-Series SoCs to cut cost, power and area. Qualcomm, for its part, plans to launch 5G SoCs in 2020.

But building 5G modems for the iPhone could be one of the biggest ever engineering challenges for Apple. Designing the modem chip could take billions of dollars in research and development spread out over more than half a decade. The challenge with 5G technology is getting the chip to connect to any network using frequency bands ranging from sub-6 GHz to millimeter wave in any part of the world where Apple sells iPhones.

“Intel’s modem business gives Apple some vital steps up the ladder, but it’s by no means enough. Radio-frequency front end technologies are [also] critical to managing the complexity of 5G,” CSS Insight wireless analyst Geoff Blaber said in a blog post. “Nonetheless, Apple now has intellectual property to complement engineering resources, and that buys it a more prominent seat at the 5G table," 

The question is whether Apple can succeed where Intel stumbled. Patrick Moorhead of Moor Insights and Strategy pointed out that Intel’s 5G modem faced long delays before the firm pulled out of the smartphone space. While Apple is no longer starting from scratch, it's still unclear how long and how much money it could take for Apple to start selling iPhones and other products with its own modem chips inside.

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