Apple's (NASDAQ:AAPL) use of an Intel (NASDAQ:INTC) modem for AT&T (NYSE:T) versions of iPhone 7 appears to have been motivated by cost considerations and the desire to develop a source alternative to Qualcomm (NASDAQ:QCOM). However, the Intel version of iPhone shortchanges customers in two important ways. The Intel modem demonstrates inferior performance compared to the Qualcomm modem, based on objective measurements. And the Intel version of iPhone 7 will have less residual value once it's unlocked compared to the Qualcomm version. Whatever happened to "we just want to build the best product"?
It's Not About "Throttling"
When headlines first surfaced that Apple was "throttling" the data download rates of Verizon version iPhone 7s, I was inclined to discount the reports. These were based on a Bloomberg report that actually didn't accuse Apple of data throttling. Instead, the report pointed out that the performance difference was due to the way that Apple had implemented the Qualcomm modem used for Verizon, versus the Intel modem used for AT&T.
Furthermore, the chart Bloomberg published seemed to be inherently flawed (shown below).
It shows a comparison of download rates for iPhone 7 (Verizon and AT&T versions), compared with a Galaxy S7 (also on Verizon). There are all sorts of problems with this chart. First of all, the download speeds were far below the maximum capabilities of either the respective modems, or the carriers' networks. The conditions under which the data was collected were never made clear.
It's well known that carrier performance often limits the effective download speeds users can achieve, so was there really a significant difference in performance? Certainly, Apple doesn't think so. Bloomberg quoted an Apple spokesperson:
"Every iPhone 7 and iPhone 7 Plus meets or exceeds all of Apple's wireless performance standards, quality metrics, and reliability testing," Apple spokeswoman Trudy Muller said. "In all of our rigorous lab tests based on wireless industry standards, in thousands of hours of real-world field testing, and in extensive carrier partner testing, the data shows there is no discernible difference in the wireless performance of any of the models."
Furthermore, Apple doesn't appear to be literally throttling data speeds in the sense that there's some monitoring of download rates by the devices and a programmed restriction of data rates for the Verizon versions.
The maximum theoretical download speed for the Qualcomm modem is 600 Mbits/sec, whereas for the Intel modem it's 450 Mbits/sec. Apple limits the Qualcomm modem performance to 450 Mbits/sec by not implementing certain advanced capabilities in the modem.
In this sense, both modems should be on an equal footing, and it hardly makes a real world difference anyway, since the carriers don't typically support anything close to the 450 Mbits/sec maximum of the modems. Last year, PC Magazine conducted an extensive comparison of network speeds and found that the average download speed ranged from about 20-28 Mbits/sec, while the maximum ranged from about 120-160 Mbits/sec, depending on specific carrier.
Comparing iPhone 7 Performance
This would have been case closed, except that I took a look at a blog post by Cellular Insights, also referenced in the Bloomberg article. Cellular Insights performed testing of iPhone 7s in their own lab, using test equipment to simulate data transmission over various radio bands and using the communications protocols supported by the carriers, but without using the carriers themselves. Cellular Insights test results effectively took carrier performance out of the equation.
An important factor in determining practical data throughput is signal strength, and I've pointed out that lower signal strength will typically decrease data throughput. At the same time, maximizing signal strength will only increase data throughput to the maximum supported by the communications systems. This is clearly shown in the chart below, reprinted from the Cellular Insights report.
Band 4 is the most commonly used radio frequency band in cellular communications for LTE in North America. RSRP stands for Reference Signal Received Power and decreases as the values become more negative (decreasing power to the right of the scale).
While the modems were typically equal at high signal strengths, at weaker signals, the Qualcomm modem would typically significantly outperform the Intel modem. Cellular Insights tested a number of bands and obtained the same general results for all the bands tested.
Quite often, because of interference, being indoors, or because of distance from a cellular tower, signal strength can be less than optimal. So the difference between the modems has the potential to significantly impact real world performance and isn't just theoretical.
How much of a difference? Determining that conclusively would be a massive undertaking, in which one would have to measure download performance under a wide variety of conditions and usage scenarios. Lacking such data, I still consider it reasonable that the lab measurements point to a significant performance difference that will impact users.
Cellular Insights also compared Band 4 performance among various devices, including the Galaxy S7 Edge, which also uses the full capability of the Qualcomm modem in the iPhone 7. Also tested were the LG G5 and Nexus 5X, which also use Qualcomm modems.
The chart indicates that under weak signal conditions, users of the iPhone 7 with the Intel XMM7360 modem will actually be worse off than users of the iPhone 6s.
Comparing iPhone 7 Residual Value
While differences in real-world performance may still be debatable, the other important difference in the modems is an objective fact. While the Qualcomm modem supports all bands supported by either modem, the Intel modem does not. This is made clear by Apple's Tech Specs for iPhone 7:
The A1660 and A1661 models are the iPhone 7 and 7 Plus that use the Qualcomm modem. The A1778 and A1774 are the iPhone 7 and 7 Plus models that use the Intel modem. Apple's unlocked versions of the iPhone 7 use the Qualcomm modem because it can be used by any carrier.
Buyers of the Intel modem iPhones, when they eventually are able to unlock their phones (after their carrier contract expires), will have a phone with lower resale value, since it will be more limited in the carriers and bands that it supports.
Apple's offering of the iPhone 7 with Intel modem seems to be at variance with the oft-espoused principle of "building the best device". It's clearly not the best device, in terms of residual value, and probably isn't the best device in terms of real-world performance.
So why did Apple build it? This really seems to have been a "bean counter" decision. Intel, desperate to score a big win in modems, probably made Apple an offer it couldn't refuse, at least on financial grounds. And clearly Apple was also motivated to develop a second source, and remove some of Qualcomm's pricing power.
Were these sound business decisions? Apple would have needed to design separate circuit card assemblies in order to accommodate the different modems, adding to overall engineering and production expense. This would have offset to some degree the cost savings presumably offered by Intel.
Assuming that Apple still came out ahead, it seems a betrayal of customers not to have passed the savings on to them. Customers are paying exactly the same price for the iPhone 7 Intel and Qualcomm versions (all other things being equal). Yet they aren't getting truly equivalent phones, despite what Apple claims.
This does not seem to be a decision consistent with truly putting the customer first or building the best possible product. Once again, I view the Intel modem decision as highlighting the need for a Product Architect. But this is arguable.
I believe the decision to use the Intel modem was a bad decision. It unnecessarily hobbled some iPhone 7 models with lower performance and value. It shortchanged customers. It betrayed fundamental Apple values. The cost savings involved, probably no more than $10-15 per phone, don't appear to have been worth it, except to the bean counters. Increasingly, Apple's product strategy seems adrift, directionless, and susceptible to various conflicting currents and winds within Apple.
It's becoming increasingly difficult to recommend Apple, but for the time being, I will continue to do so. My basic thesis is that when Apple makes mistakes, it eventually corrects them, to the benefit of shareholders. Apple is in need of a Product Architect to provide a cohesive vision for Apple's products. The lack of that person is the fundamental mistake I believe Apple is making.
I'll review my position on Apple after fiscal Q1 results are reported in January. Until then I continue to be long Apple and recommend it as a buy for investors with a 3-5 year investment horizon.
Disclosure: I am/we are long AAPL, QCOM.
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.