The market for a critical component in next-generation smartphones is undergoing a dramatic shift at the dawn of the 5G era.
At its centre is Qualcomm, the silicon chipmaker whose miniature modems help put the "phone" in iPhone. Now, analysts say, two key developments this week stand to make Qualcomm the only major US supplier of 5G wireless chips. It's a momentous change in the industry's balance of power whose effects likely will last for years.
The deal could mean Apple's future mobile devices will use Qualcomm's chips to connect to high-tech 5G networks, which promise ultra-fast download speeds and access to new technologies, apps and services.
Within hours of the settlement's announcement, Qualcomm's biggest rival, Intel, said that it was abandoning the market for 5G chips altogether to focus on other aspects of 5G technology. Intel had been slated to provide Apple with 5G chips for its 2020 iPhone. That essentially left the market for 5G chips - which is expected to grow to $20 billion globally by 2025 - to Qualcomm and a handful of other producers.
"In the U.S., around 5G, it's Qualcomm's world and everyone else is just paying rent," said Dan Ives, an industry analyst at Wedbush Securities. "Qualcomm's competitive position is significantly strengthened now."
Qualcomm's major competitors now are China's Huawei and South Korea's Samsung. But those companies produce chips primarily for their own lines of branded smartphones, rather than selling them to phone makers like Apple.
Qualcomm also competes in the chip market with Taiwan-based MediaTek, said Roger Entner, an industry analyst at Recon Analytics. But MediaTek, he said, is typically found in lower-end devices, not premium phones like the iPhone.
"If you want to make a really cheap phone, you use MediaTek chipsets," said Entner. "They're not as good as Qualcomm."
That leaves Apple in a difficult position. Between its deal with Qualcomm and Intel's exit from 5G chips, Apple is now beholden for the foreseeable future to a single 5G modem supplier.
Both Qualcomm and Apple declined to comment.
Apple has used Qualcomm exclusively in the past, but it has shown a distaste for that kind of arrangement. Last year, Apple sought to gain leverage over Qualcomm by hiring Intel to supply roughly half of the 4G chips in its iPhones.
By playing one company off the other, Apple hoped to keep its costs down. But with Intel out of the market, Apple can no longer count on that dynamic. Nor can any other phone maker that must buy their 5G chips on the open market.
Intel had been struggling for years to build wireless chips that were as good as Qualcomm's, analysts say. On key metrics such as battery life and mobile data speeds, Qualcomm's chips simply performed better.
"Generation after generation, Qualcomm has demonstrated they have an ability to develop products faster than their competitors," said Walt Piecyk, an industry analyst at the research firm BTIG. He added: "Qualcomm has shown over the past 20 years their ability to make better products than not only their competitors, but also the attempts companies have made to build [chips] internally."
Intel acknowledged its disadvantage in 5G chips in its announcement Tuesday.
"It has become apparent that there is no clear path to profitability and positive returns," chief executive Bob Swan said in a statement.
Some have speculated that Apple, much like Samsung and Huawei, could seek to design its own chips in the future - either to gain independence from Qualcomm or to compete head-to-head on wireless chips. Several Apple job listings have suggested the company may be exploring that strategy. But analysts said it can take years of investment and hard work to develop what can be purchased from other vendors in an instant.
The Chinese technology giant Huawei said this week it is open to selling its wireless chips to Apple. But a number of analysts dismissed the offer as "trolling," saying ongoing U.S. government concerns about the security of Huawei products - along with Apple's privacy-conscious marketing - would make it challenging if not impossible for Apple chief executive Tim Cook to accept.
"The political environment would make it difficult for Huawei to find their way into Apple's phones, particularly given the focus that Tim Cook has placed on privacy," said Piecyk.
For U.S. phone makers, few major vendors remain in the market for 5G chips. And they cannot afford to wait for another developer to come along, particularly when federal officials and wireless carriers are pushing rapid adoption of 5G as a national imperative.
"By late 2020 in the U.S., we will have nationwide 5G networks in the traditional [airwave] bands," said Entner. "If you don't have a good 5G phone [to sell], you're in trouble."
© Thomson Reuters 2019