Apple Looks to Other Chip Suppliers Amid Qualcomm Dispute

In the midst of its legal battle with Qualcomm, Apple is designing next year’s products with modem chips from Intel or MediaTek. According to sources, Apple has taken this step because San Diego-based Qualcomm has not supplied the software necessary to test its chips in the Silicon Valley company’s iPhone and iPad prototypes. However, Qualcomm argues this point and is now suing Apple for failing to abide by the terms of its software license. Apple filed a federal suit against Qualcomm in January, claiming it unfairly blocks rivals and charges excessively steep patent royalties.

The Wall Street Journal reports that Qualcomm’s response is that, “Apple is mischaracterizing its practices” and that its “modem that could be used in the next generation iPhone has already been fully tested and released to Apple.” The chips in question “handle communications between wireless devices and cellular networks,” and Qualcomm is “by far the biggest supplier of such chips.”

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Apple began to veer away from Qualcomm chips with its iPhone 7 and 7 Plus smartphones, which incorporate Intel chips, and “again used a mix of the two in the iPhone 8 and 8 Plus.” Sources say that Apple could still change its mind about modem-chip suppliers “as late as June, three months before the next iPhone is expected to ship.”

According to Bloomberg, “Apple and regulators are challenging the way Qualcomm charges fees for patents,” saying that, “instead of charging fees based on the price of phones, Apple wants it based on the cheaper price of modems.”

Last year, Macquarie Capital estimated that Qualcomm sold “around $3.2 billion of modem chips a year to Apple, or 20 percent of its total chip sales,” a number that will dip this year to “$2.1 billion, or 13 percent of total chip revenue.” Qualcomm’s royalty business is more lucrative, however: Macquarie Capital stated that, “Apple paid $2.8 billion last year in Qualcomm royalties, which accounted for nearly 30 percent of the chip maker’s per-share earnings.”

For Apple, the risk of moving from Qualcomm chips is that, “semiconductor analysts widely consider modem chips from Intel and MediaTek, a smaller chip designer based in Taiwan, to lag Qualcomm in performance in areas such as download speeds.” Qualcomm chief executive Steve Mollenkopf “expressed optimism that the two companies would find common ground.”

Bloomberg reports that what Qualcomm is losing with Apple business is being made up by an increase in income from sales to China. According to data compiled by Bloomberg, “sales in Qualcomm’s fiscal first quarter will be $5.5 billion to $6.3 billion,” and “earnings per share, excluding some items, will be 85 cents to 95 cents.”

In the latest update to the rivalry, Bloomberg reports that Qualcomm filed a “lawsuit against Apple on Wednesday in California state court in San Diego.” The suit contends that Apple breached a “contract that governs the use of software needed to make chips work with other parts of mobile phones and communicate with networks.”