Apple considering dropping Qualcomm chips

 

 

According to Reuters and other sources, Apple is considering dropping Qualcomm as its chip supplier for iPhones and iPads. If it follows through with this, the first products without Qualcomm chips will be released in the US in late 2018. The story was floated by two well informed sources who also let it be known that Apple might still change course before this happened.

The sources are described in traditional terms as “people familiar with the matter”, often a code for insiders. However they have refused attribution because they are apparently not authorised to give media briefings.

 

Qualcomm and Apple at odds over licences

The underlying issue is the legal dispute between Qualcomm and Apple over licensing which shows no signs of cooling. Some time after the lawsuit started, Qualcomm apparently ceased to give Apple the software that is required for testing some Qualcomm chips that are used in iPhone designs. Qualcomm informed Reuters that it was giving Apple fully tested chips for use in iPhones. They issued a statement saying that they were committed to supporting new products from Apple, in the same way they supported other players in the industry.

Stacy Rasgon, an analyst at Bernstein, has pointed out that Apple’s move wasn’t entirely unexpected. For several years past, Qualcomm has supplied iPhone modems which are used to connect the phones to wireless data networks. However more recently, Intel has been supplying getting on for half of the modem chips used in iPhones and MediaTek chips are also being used. According to Rasgon, Intel recently went out and bought a company that will enable it to substitute their chips for even more Qualcomm chips in iPhones. The iPhone 7 and 8 and the iPhone X use a mixture of Qualcomm and Intel chips.

Apple will undoubtedly have several contingency plans in place, so it’s too early yet to say whether the company will definitely cease using Qualcomm in 2018. Apple is large enough to keep several options open until nearer the time. A few years ago, Samsung designed a phone that didn’t use Qualcomm chips and Qualcomm didn’t find out until it was very near the shipping deadline. Those who are familiar with Apple manufacturing timelines said that it would be possible to change the supplier of the new iPhone’s modem chip right up to three months before the shipping date for the phone.

 

Apple’s new supplier strategy

Apple is reported elsewhere, as developing a business strategy that puts two suppliers in place for key iPhone components. This gives the company more negotiating room when it is discussing royalty payments to suppliers and may lie behind the involvement of MediaTek.

 

So what is the basis for the ongoing litigation between Apple and Qualcomm?

Regulators have Qualcomm in their sights-

It began when the Federal Trade Commission (FTC) complained that Qualcomm had forced Apple to include its baseband chips and that this was because they resulted in higher royalties for Qualcomm. This was a signal to Apple, who then sued for $1bn, accusing the company of monopoly position abuse, and using excessive royalties and exclusionary tactics to limit competition.

The reason the regulators both in the US and in South Korea have Qualcomm in their sights, is that the company won’t license its patents for the technical standards used in the basebands which connect smartphones to networks. So Intel and MediaTek can’t use the technology. Qualcomm gets a royalty from the makers of the handsets, which is based on how much the phones cost. At this stage, the whole dispute gets into complex technical territory dealing with which licence fee relates to which patent and so on.

Qualcomm has dismissed the accusations against it as baseless, and has tried to prevent iPhone manufacturing and sales in China, and to get a ban on iPhone imports into the US.

Last April, the Financial Times reported on Qualcomm’s revenue warning. This was a result of Apple withholding payments to its iPhone suppliers, which in turn meant they couldn’t make royalty payments on Qualcomm’s chip designs. The ongoing costs of this remain to be seen.

 

.