On April 16, 2019, I was in the overflow room of the San Diego courthouse of the United States District Court for the Southern District of California when Apple and Qualcomm--with opening arguments still ongoing--announced the settlement of their global antitrust and patent dispute. In the build-up to that Apple v. Qualcomm trial, the San Diego chipmaker publicly extended an invitation to Apple to help them bring a 5G iPhone to market, and rumors were flying that Apple had lost faith in Intel's ability to deliver a high-quality 5G baseband chip in time.
Delays with a 5G iPhone could have cost Apple some market share to Android. While the vast majority of Apple customers don't switch even when Apple is years behind in other respects (particularly with respect to screens: originally "phablets" and now foldable phones) because Apple manages to make them all believe that it's at the forefront of innovation, even they would have wondered whether buying a 4G iPhone is a good choice when the rest of the industry is already transitioning to 5G. The simple difference between the numbers "4" and "5" would have been too much even for many Apple customers. It would have been a serious threat even to Apple's luxury image. So Tim Cook--who a few months before the settlement had categorically ruled out a deal as he deemed Qualcomm's business model "illegal"--wasn't going to take any chances. With the benefit of 20/20 hindsight we can say, 3 1/2 years later, that it was in all likelihood the right decision: Qualcomm announced its numbers and offered a new forecast yesterday according to which it's still going to supply modem chips for the majority of 2023 iPhones (instead of only 20% of all iPhones sold that year, though the operating assumption for now is that Apple will use its own chips in fiscal year 2025.
I just said "in all likelihood" because, of course, we'll never know for sure what would have happened in a but-for world. If Apple had still relied on Intel, and if Intel had kept that cellular baseband chip division, it is theoretically conceivable that it wouldn't have taken that long to become independent of Qualcomm's chips. At least one analyst, Patrick Moorhead, blames Apple:
PSA: modems and RF are hard. @Apple acquired @intel’s #5G hardware, designs, IP in July 2019. That’s right, $AAPL can’t get its shit together after nearly 3.5 years. Now $QCOM gets the modem for another year. WTF is going on at Apple? https://t.co/DAKIizRiYG
— Patrick Moorhead #HCEConnect (@PatrickMoorhead) November 3, 2022
But another analyst, Roger Entner, emphasizes the magnitude of the task:
This shouldn't come as a surprise. 5G Modems are HARD. I wouldn't be surprised if Apple wouldn't need the entire contract period to get their modems ready. Look at how long it took Mediatek to be in the ballpark of what Qualcomm delivers https://t.co/wImau5Jncp
— Roger Entner (@RogerEntner) November 2, 2022
If the scenario described by Mr. Entner becomes reality, Apple is still more than two years away from making its own 5G modem chips.
Unrelated to modem chips, there is also an interesting development in the relationships that chip design company Arm Ltd. has with component makers like Qualcomm on the one hand and end-product makers like Apple on the other hand. Recent court filings suggest that Arm may increasingly prefer to deal directly with end-product makers rather than the likes of Qualcomm.
It's not easy to tell how innovative Apple is. Relative to its enormous profitability, it certainly isn't: it rakes in most of the profits of the smartphone industry, but it's not ahead of the crowd; instead, one can find interesting innovation (such as foldable phones) in Android devices, often many years before Apple adopts them, too. It's also noticeable that Apple increasingly engages in monopoly rent-seeking in app distribution and other aftermarkets (it isn't growing its advertising business through innovation, but through an abuse of power) and generally monetizes its huge and affluent customer base in ever more ways (last month, Apple started offering a savings account in collaboration with Goldman Sachs and is now even predicted to launch a health insurance offering in 2024. To be clear, a company can pick low-hanging fruit through a partnership with Goldman Sachs and simultaneously still be the industry's most innovative player--the former could help finance the latter. But at this stage I can't see anything in technological terms that Apple could offer me and the Android ecosystem couldn't.
If Apple's success was attributable to the "virtuous circle" of investment in innovation generating returns that are partly reinvested in ever greater innovation, the rest of the smartphone industry couldn't even see Apple's tail lights by now.
During Qualcomm's earnings call, analysts appeared concerned--and Qualcomm's leadership appeared to understand those concerns--that the smartphone device market is ever more concentrated and that Android keeps losing market share to iOS. Android devices are a much bigger revenue opportunity for Qualcomm with its Snapdragon chips--and the moment Apple can make its own modem chips, the only Apple-related revenue source for Qualcomm will be patent royalties. The patent license agreement has the same term as the chipset supply agreement (until 2025), but there is an option for a two-year extension, which is presumably a unilateral option that Apple can exercise--or Apple can say "we don't need your chips anymore and now let's just renegotiate those patent license terms, potentially entailing litigation." The parties are indeed preparing for a mid-term round of renewed patent litigation: Qualcomm openly criticizes Apple for its standard-essential patent (SEP) devaluation efforts, and Apple would have very much wanted to pursue the invalidation of a patent Qualcomm might assert again next time.
Android's weakness especially in the U.S. and some other high-income geographies is indeed alarming. I continue to believe that Google's strategic mistake is to antagonize app developers almost to the same extent that Apple does instead of leveraging the potential of the developer community in a way that would turn the trend around and could erode the iPhone's market share for a change. Google is fighting against app developers side by side with Apple instead of throwing Apple under the bus.
While it is obvious at any rate that Qualcomm has a greater opportunity in the Android ecosystem, it is also reflected by Qualcomm's CEO's tweet in support of Google's #GetTheMessage campaign--an initiative by Google that appears unlikely to move the needle.
Whether Android keeps bleeding market share is not a question of the quality of Qualcomm's products. Qualcomm's growth opportunity in smartphones depends on Google making the right choices. In the short term, Apple's delays certainly help.
