The Age Of 5G Is Upon Us And Apple Is Badly Positioned Unless It Settles With Qualcomm

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About: Apple Inc. (AAPL), Includes: QCOM
by: MarketGyrations
Summary

5G is near us and it offers consumers many new possibilities that were previously unavailable.

Apple may be slow to offer 5G and this could put additional pressure on iPhone sales.

Settling with Qualcomm is the best possible solution that could fix Apple’s disadvantage versus the competition.

Apple (NASDAQ:AAPL) has recently seen its stock come under pressure after reporting that it would no longer disclose the number of iPhones sold. This raised some eyebrows because it suggested that the iPhone is experiencing problems. It then reported in its latest earnings release that iPhone revenue declined by 15% in Q1. A previous article points out why Apple is likely to again fall short of revenue guidance in fiscal Q2.

But besides Q2, there is reason to believe that the following quarters will also continue the trend of weak iPhone sales due to additional factors. That is because 5G is about to take off and Apple is ill-prepared to take advantage of this opportunity that should invigorate smartphone sales. Core to this issue is the legal dispute that Apple currently has with Qualcomm (QCOM) and which also involves Intel (INTC).

Why 5G could boost smartphone sales

After years of anticipation, it is safe to say that consumers all around the world can expect to have 5G networks available in the near future. These 5G networks will succeed 4G LTE, which is the current standard in wireless communications technology. The 5G networks will not only be faster and more efficient compares to their predecessors, but they will also allow new possibilities that are currently not available.

Data transfer speeds from 5G connections under lab conditions have reached as high as one terabit or 1000 gigabits per second. Under real world conditions speeds are likely to be significantly less. Maybe between one half and one gigabit per second, which is still much faster than the one to ten megabits per second with 4G. The actual numbers people will get can vary depending on several factors such as the number of connections in close proximity, the device used and network coverage.

But most importantly, 5G connections will have much lower latency. Latency is the time that passes before data transfer starts following a request for its transfer. Lower latency makes for a more responsive experience, which is crucial for many applications. If 4G offered a latency of 50 milliseconds and above, then 5G will lower that to between one and ten milliseconds. These latency levels will make applications such as driverless vehicles or augmented/virtual reality using cloud-based processing feasible.

5G will also be able to support and manage a much larger amount of connections on the network, which will make the Internet of Things possible where many more devices will be connected than is currently the case. In short, 5G is a must because of the possibilities that it opens up. It is therefore important that companies offer products that make 5G a reality for consumers. The recently concluded Mobile World Congress in Barcelona or MWC2019 confirms that statement.

Apple is lagging behind the competition when it comes to 5G

No other company has done more to make the smartphone mainstream to consumers than Apple. For quite some time, Apple pioneered new technology and brought them to the masses. But when it comes to 5G, it looks like Apple will be late to the party. Other companies will have 5G smartphones available starting in 2019, but Apple currently does not expect to have one until next year in 2020 at the earliest.

This is not the first time that Apple is late to the table when it comes to cellular standards. The original iPhone was launched in 2007 without support for 3G. Only one year later did Apple add support for 3G with the launch of the iPhone 3G. Waiting one year will not be unprecedented and it didn’t stop the rise of the iPhone. So Apple not offering 5G in 2019 will probably not be that big of an issue, especially since true 5G networks will take time to get operational.

It’s important that people realize that not all 5G is equal. In fact, some so-called 5G is just 4G in disguise. For instance, in the U.S. AT&T has something called 5G Evolution or 5G E, which is actually the latest update to 4G LTE. While 5G E will support 4G LTE and its advanced derivatives like LTE-A and LTE-A pro, there is no actual support for 5G.

What is holding up Apple’s 5G iPhone implementation?

In order for a smartphone to make a connection to the network, it needs to have a baseband modem chip. This is also known as the baseband processor, which is distinct from the application processor. The latter is often thought of as the cpu of a smartphone. While Apple designs its own application processors with the A-series, it relies on an outside vendor to supply it with the modem chip it needs.

For quite some time, this company used to be Qualcomm. However, beginning in 2016 with the launch of the iPhone 7, Apple also started to use modem chips from Intel in addition to the ones from Qualcomm. This continued in 2017 and in 2018 Intel became the sole supplier of modem chips to Apple after legal disputes between Apple and Qualcomm intensified.

As long as legal issues are pending in court, Apple cannot rely on Qualcomm as a supplier. This means Apple will have to rely on Intel if it wants to launch an iPhone with 5G in 2020 as intended or find someone else like Samsung or Mediatek. The problem with Intel is that its track record in recent years has been less than stellar.

Its first attempt at a 5G modem, the XMM8060, was supposed to be available by mid 2019. However, this chip reportedly suffers from technical issues, including overheating, and has now been dropped in favor of an improved design called the XMM8160. Intel hopes that the new chip will be ready by late 2019 so products could use it in 2020.

Intel has to solve both the design of the modem chip and the method used to manufacture it

On top of this, Intel’s 10nm process technology has also seen delays with Intel admitting that it underestimated the complexity involved. Process is the manufacturing method used to make silicon chips and it gives you an indication of how small the transistors are at a certain process node, such as 10nm.

The 10nm process node was supposed to be ready years ago, but Intel is still stuck at 14nm. It is believed that while 10nm samples have been shown, Intel is still struggling with several issues at 10nm, including getting yields at 10nm up to par. Intel believes that the 10nm process will be ready for volume production before the end of 2019. The XMM8160 is supposed to use this new 10nm process.

Note that by shrinking the size of transistors by moving to a new process node lowers power consumption, which is said to be a key problem Intel is facing with its 5G modem. If the 10nm process is delayed again, then Intel will have a problem with its 5G modem. This would in turn affect Apple as the most likely user of the XMM8160.

Intel could fall back on 14nm for the XMM8160. But Intel would have to compete against the Snapdragon X55 from Qualcomm, which is manufactured using the 7nm process from Taiwan Semiconductor Manufacturing Company. Anyone using Intel’s chip modem in this case would be at a disadvantage to competitors using Qualcomm’s modem, which is not likely to be acceptable.

Intel may not deliver a 5G modem chip in time for a fall 2020 launch by Apple

Intel has been vague about the exact status of its 5G modem. While Intel has promised that its 5G modem will be available later this year, it has not indicated when exactly consumer products using its 5G modem chip will be available. Only that it expects it to be in 2020. But the exact timing is crucial for Apple if it is to release a 5G-capable iPhone in the fall of 2020 as currently expected.

Apple tends to release its latest iPhone in September, which means that there won’t be much time to get everything in order even if Intel does have a modem by late 2019. Remember that there is an entire process that needs to be followed before an iPhone is released. For instance, knowing which components will be available, determine if components meet desired specs, finalize the design, placing orders for components, start mass production, and so on.

Any hiccups along the way and Apple will be faced with the issue of having to delay launch of its new iPhone or use another base modem, which could include dropping 5G functionality all together from its iPhone. There is a real chance that issues at Intel could force Apple to alter its plans when it comes to 5G.

Who are the alternative suppliers of 5G base modem chips?

Apple is hedging its bets and is said to be considering alternatives to Intel in case it fails to deliver. While Apple has started the process of one day designing its own modem chips, it will be many years before it can expect to see any results. In the meantime, Apple will have to find an outside vendor if Intel comes up short.

The table below lists all the current suppliers that have 5G modem chips available or expect to have them soon. Both Huawei and Unisoc are from China and Apple cannot realistically consider using a modem from China, which means they are not an option. That leaves Qualcomm, Samsung and Mediatek as the only options besides Intel.

Company – 5G Base modem

Available

Features

Smartphones

Qualcomm – Snapdragon X50

Now

Single mode only, no multi-mode support, requires separate Snapdragon 855 to work

Samsung Galaxy S10 5G

Supports TDD spectrum only / no FDD support

LG V50 5G

Supports Non-standalone network architecture only / no standalone architecture support

Many others

Supports both sub-6GHz and mmWave frequency

Qualcomm – Snapdragon X55

Late 2019 (estimate)

Single chip / multi-mode support

N/A

Supports both TDD and FDD spectrum

Supports both Non-standalone and standalone network architecture

Supports both sub-6GHz and mmWave frequency

3GPP Release 15 compliant

Intel - XMM8160

Late 2019 (estimate)

Single chip / multi-mode support

N/A

Supports both TDD and FDD spectrum

Supports both Non-standalone and standalone network architecture

Supports both sub-6GHz and mmWave frequency

3GPP Release 15 compliant

Huawei – Balong 5000

Now

Single chip / multi-mode support

Huawei Mate X

Supports both TDD and FDD spectrum

Supports both Non-standalone and standalone network architecture

Supports both sub-6GHz and mmWave frequency

3GPP Release 15 compliant

Samsung – Exynos 5100

Unknown

Single chip / multi-mode support

N/A

Supports both TDD and FDD spectrum

Supports both Non-standalone and standalone network architecture

Supports both sub-6GHz and mmWave frequency

3GPP Release 15 compliant

Mediatek – Helio M70

Late 2019 (estimate)

Single chip / multi-mode support

N/A

Supports both TDD and FDD spectrum

Supports both Non-standalone and standalone network architecture

Supports sub-6GHz frequency only / no mmWave support

3GPP Release 15 compliant

Unisoc - Makalu IVY510

Late 2019 (estimate)

Single chip / multi-mode support

N/A

Supports both TDD and FDD spectrum

Supports both Non-standalone and standalone network architecture

Supports sub-6GHz frequency only / no mmWave support

3GPP Release 15 compliant

Source: Qualcomm, Intel, Huawei, Samsung, Mediatek, Unisoc

Neither Samsung nor Mediatek seem to offer a better alternative to Intel

While Mediatek has a product in the Helio M70, it is not really designed for the high-end smartphones that Apple makes. Mediatek tends to go after the mid-range of the market. The Helio M70 does not seem to have millimeter wave or mmWave frequency support, which is needed for top 5G performance in terms of bandwidth and latency.

The status of Samsung’s Exynos 5100 is unclear. Last year Samsung said that its 5G modem would be ready by the end of 2018, but things have gone quiet since then. The modem has yet to be seen in any products, which could be a sign that work is not yet finished. When Samsung did release a 5G smartphone in the Galaxy S10 5G, it opted to use the Qualcomm Snapdragon X50.

This modem is on paper significantly inferior to the Exynos 5100, which suggests that the Exynos 5100 may not yet be ready. Otherwise, why need a worse product if you have a better product available. Fact is that Apple tried to find out if Samsung or Mediatek could supply modem chips in addition to Intel for a 5G iPhone in 2019, but all three companies were in no position to do so.

That leaves Qualcomm as the best supplier of modem chips available

Qualcomm together with Huawei are the only two vendors that have smartphones available using their 5G modem chips. All others are still busy getting their products ready for consumers. The Snapdragon X50 may not have all the desired features, but it is ready and a slew of products have been announced as using it.

The improved Snapdragon X55 is certain to be ready in time for a 2020 iPhone based on what we have seen from Qualcomm at the Mobile World Congress in Barcelona. If Apple wants to make sure that 2020 is the year that it starts to participate in the 5G race, then the best option is to take no chances with vendors that may or may not deliver and go with Qualcomm.

Having Qualcomm as a supplier would bring clarity and remove the uncertainty regarding the 5G modem chip. Apple could still leave Intel in the running so it does not have to rely on any one supplier. Naturally, if Apple wants to use Qualcomm as a supplier, then the two will have to solve all outstanding legal issues.

Both companies stand to gain with a resolution. Apple would get access to what is the best modem chip in the Snapdragon X55 with the possible exception of the Balong 5000 from HiSilicon. This would eliminate any performance gaps that could potentially exist between the iPhone and competitors. Qualcomm would regain a very important customer that could contribute heavily to revenue.

Possible consequences of Apple not having 5G

Apple will eventually join the 5G train. The question is when. However, in the meantime Apple runs the risk of being the only major smartphone manufacturer without 5G support. Qualcomm has already announced that 18 companies have selected the Snapdragon X50 for products to be released in 2019. The list includes Samsung, LG, Sony, Fujitsu, Sharp, HTC, Asus, Oppo, Vivo and Xiaomi.

Not offering 5G may not be a big issue for Apple in 2019, but it will be one in 2020 when 5G networks are expected to be widely available to consumers. Apple could be seen by some customers as using old and outdated technology, even though it is supposed to specialize in the high end of the smartphone market where consumers expect to find the best available.

Without 5G support in the iPhone, Apple cannot offer the possibilities that it provides. For instance, Tim Cook has stated that he's a big believer in augmented reality. If that’s the case, then 5G opens up many new possibilities in that field. No 5G support will cause iPhone users to miss out on important progress until Apple catches up. Meanwhile, users of other smartphones will be moving ahead, which could induce some to switch away from the iPhone.

There are already signs that Apple is no longer leading as it has in the past, but is falling behind even excluding 5G. The competitiveness of the iPhone is getting shakier versus the competition as my article that I linked above previously discussed. With quite a few people already of the opinion that Apple is lagging behind in certain areas, such as camera quality, the absence of 5G in the iPhone and the possibilities it offers is just another potential reason for people to justify not picking the iPhone over a competing product.

While there is still time to resolve its supply chain, Apple is currently badly positioned with 5G modem chips. Legal issues have eliminated Qualcomm and Intel, Samsung and Mediatek all have their drawbacks as a supplier. If Apple is forced to delay the launch of an iPhone with 5G support into 2021, which could quite possibly happen, then Apple could see further declines in iPhone sales that is already under pressure. The first table below show how much iPhone revenue has fallen in the most recent quarter.

The second table shows how iPhone weakness has led to overall revenue dropping, especially in China where consumers have the greatest choice when it comes to the number and variety of smartphones available and competition is therefore the fiercest. The lack of 5G support in an iPhone when other smartphones do offer this capability could give the impetus for even more declines in iPhone revenue down the road.

Segment

Revenue

YoY

iPhone

$52.0B

-15%

Mac

$7.4B

+9%

Wearables, Home and Accessories

$7.3B

+33%

iPad

$6.7B

+17%

Services

$10.9B

+19%

Quarter

Total Revenue

YoY

Americas

Europe

Greater China

Japan

Asia Pacific

iPhone Units

Q1 2019

$84.3B

-4.5%

$36.9B

$20.3B

$13.1B

$6.9B

$6.9B

N/A

Q4 2018

$62.9B

+19.6%

$27.5B

$15.3B

$11.4B

$5.1B

$3.4B

46.9M

Q3 2018

$53.3B

+17.4%

$24.5B

$12.1B

$9.5B

$3.8B

$3.1B

41.3M

Q2 2018

$61.1B

+15.5%

$24.8B

$13.8B

$13.0B

$5.4B

$3.9B

52.2M

Q1 2018

$88.3B

+12.7%

$35.1B

$21.0B

$17.9B

$7.2B

$6.8B

77.3M

Q4 2017

$52.5B

+12.0%

$23.0B

$13.0B

$9.8B

$3.8B

$2.8B

46.6M

Q3 2017

$45.5B

+7.0%

$20.3B

$10.6B

$8.0B

$3.6B

$2.7B

41.0M

Q2 2017

$52.8B

+5.0%

$21.1B

$12.7B

$10.7B

$4.4B

$3.7B

50.7M

Q1 2017

$78.3B

+3.0%

$31.9B

$18.5B

$16.2B

$5.7B

$5.8B

78.2M

Source: Apple

Settling with Qualcomm offers the best path forward

Apple is currently involved in a number of disputes with Qualcomm. One of them actually relates to the issue of modem chips that were previously discussed. Apple disputes this, but Qualcomm asserts that Apple assisted Intel in developing its own modem chips using Qualcomm’s modem chip technology. These modem chips from Intel are now used by Apple in place of the ones from Qualcomm.

This issue could have significant ramifications for the parties involved depending on the ruling. Intel currently supplies modem chips to Apple instead of Qualcomm. If the dispute is ruled in favor of Qualcomm, then Apple will have a big problem. Apple could be forced into ruling out a launch of a 5G iPhone using Intel’s 5G modem chip, which as stated before will not be a positive development for iPhone sales that are already weak.

To be fair to Apple, it probably does have a point with its core argument that it is unfair that royalty streams are based on the cost of the entire device. There is no question that companies should be rewarded for their work.

But does that mean they should also profit off of smartphone components with which they have nothing to do? Imagine a future world where driverless vehicles have become a possibility thanks to among others 5G. Will patent holders be allowed to charge royalties based on the price of the entire car and not just the chips it contains?

Having said that, the legal disputes with Qualcomm are arguably more trouble than they’re worth for Apple. Compared to how much potential sales revenue Apple could lose due to delays with 5G support, it is less risky to simply go back to the old arrangements that existed between Apple and Qualcomm.

The alternative is to rely on Intel, Samsung or Mediatek that all carry the risk of not being able to deliver or being stuck with a product that is plagued with technical issues. If Apple wants to avoid this and give its customers the best experience possible, then Qualcomm is the one that makes that possible. Therefore, while settling with Qualcomm is not ideal, it is the best way forward and the most likely outcome for Apple.

Source: Wikimedia Commons

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.