It is well known that Apple (NASDAQ:AAPL) develops its own applications processors for its iPad and iPhone product lines. However, what Apple doesn't do in-house (and what would be exceptionally difficult for the company to do) is develop its own cellular modem technology. Sure, if Apple absolutely needed to, it could purchase one of the smaller players here (although the number of companies with this capability is shrinking), but it'd be very tough.
Intel could win non-CDMA iPhone SKUS
The likelihood of Apple doing its own modem to integrate into the A-series chips is low - at least in the near- to medium-term - so the company is going to keep on buying discrete modems. The current undisputed champion in the cellular baseband space is Qualcomm (NASDAQ:QCOM), but competition from both Intel (NASDAQ:INTC) and Broadcom (BRCM) - the two players likely to be viable alternatives to Qualcomm on the cellular side of things long-term - is coming.
Indeed, while it's exceptionally unlikely that Intel will win the applications processor spot within the iPhone/iPad (barring a foundry deal), there's no reason that Intel couldn't win a cellular baseband socket in the iPhone for a non-CDMA region (which would be most of them). Remember, Apple typically does multiple SKUs of its phone, each configured for a specific region/standard. So, while Intel couldn't win the iPhone SKUs intended for Verizon/Sprint, it could certainly win SKUs that worked on T-Mobile and AT&T.
Quantifying the potential win for Intel (and the potential loss for Qualcomm)
From what Intel has disclosed about its upcoming XMM 7260 LTE-Advanced modem slated to launch in the first half of 2014, it seems extremely competitive with the MDM9x35 series modems coming from Qualcomm during the second half of 2014 (meaning that Intel could actually have a slight lead on Qualcomm for category 6 - that's 300 megabits per second throughput).
It seems likely that Intel could make a serious pass at winning some of the iPhone 6 sockets with its XMM 7260. Now, if it were to win - say - 30% of the baseband shipments to Apple longer-term, and if we are to assume that these chips sell for roughly $20 a piece, then this would translate into $1.2 billion in incremental revenue (assuming 200 million total iPhone units shipped) - not chump change.
The corollary to that, however, is that Qualcomm stands to lose about $1.2 billion in sales annually if Intel actually does successfully win roughly 30% of the baseband business at Apple on a longer-term basis. While the secular growth in the handset market will continue and Qualcomm will more than be able to keep growing its revenues in such an event, this could be a pretty big headline blow should it materialize.
Why is this even on the table?
When discussing XMM 7260 at Intel's recent analyst day, Hermann Eul talked about how there was one customer "aggressively pushing" Intel to get 7260 out of the door quicker. If Qualcomm's MDM9x15 and MDM9x25 are so great and unbeatable, then why would any customer be so desperate for Intel to get its part out?
Part of it is probably that Intel will price aggressively to gain share, but even then, if Qualcomm had the better part, Intel's part would simply be used as a negotiation tactic rather than as something that a customer was super anxious for. No, I think that Intel could very well be first to market with a cat-6 LTE modem, and I think that many investors don't give Intel enough credit for the actual quality of the solutions that its mobile group (former Infineon) can actually put out. With massive funding, aggressive hiring, and a real understanding of the importance of comms in this space, I think Intel will be a very viable player long-term comms competitor.
Everybody is so focused on what could go wrong for Intel and what could go right for just about every other player in the mobile market and their efforts to expand into Intel's core PC and server market, but nobody has stopped to think of what Intel could do to the mobile players going forward. And, let me tell you, the odds of Intel winning some baseband share at Apple longer-term are pretty good. The odds of Qualcomm coming up with a Xeon competitor, as many have speculated, aren't anywhere near as good.
Disclosure: I am long INTC, BRCM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.