Apple and Qualcomm Reach Agreement, Indicating Delay in Apple’s Modem Chip Development

Apple Inc. has decided to prolong its contract with Qualcomm Inc. for an additional three years to acquire modem semiconductors. This move indicates that Apple’s endeavor to independently develop these chips is experiencing delays beyond initial projections. Following this announcement, Qualcomm shares experienced a significant surge.

The new deal covers “smartphone releases in 2024, 2025 and 2026,” Qualcomm said in a statement on Monday. The companies’ deal was set to expire this year, and the latest iPhone, due Tuesday, was expected to be one of the last to rely on a Qualcomm modem chip.

Instead, Qualcomm maintains its profitable position in Apple’s supply chain. The iPhone manufacturer is Qualcomm’s biggest customer – according to data collected by Bloomberg, it accounts for almost a quarter of the turnover. And their relationship helps bolster Qualcomm’s claim that it has the best smartphone modem, a critical component that allows devices to connect to the Internet and make phone calls. Since the iPhone 12 generation, the chip has supported faster 5G networks.

“This agreement reinforces Qualcomm’s record of continued leadership in 5G technologies and products,” the San Diego-based chipmaker said. Although the financial terms of the new agreement were not disclosed, Qualcomm said it was similar to the previous arrangement signed in 2019.

Qualcomm shares were up 4.3% at 9:30 a.m. Monday in New York. Apple rose 1.2 percent.

For Apple, the change suggests that building the modem component has been more challenging than expected. The work has lasted for years. The Cupertino, Calif.-based company started the project in 2018 and bolstered it by buying Intel Corp.’s smartphone chip business in 2019.

By 2020, Apple declared the development of its own modem “a key element in the strategy transition”. Its chip manager Johny Srouji said at the time that work was in full swing.

Some analysts expected the component to be ready for the 2023 iPhone, but Qualcomm quashed that speculation last year. Apple still planned to ship the modem in either late 2024 or early 2025, Bloomberg News previously reported. Now the project has a longer runway before it is finished.

It’s been a tough endeavor: Apple needs a chip that can connect to multiple cell phone networks worldwide and offer performance as good as or better than Qualcomm’s. It has problems with battery life, and there are bureaucratic challenges like getting the modem certified by the authorities.

The company’s in-house chip push – Apple Silicon – has fared better elsewhere. Apple has been replacing Intel processors in its Macs for the past three years without many problems, and the battery life and performance boost of these machines have been selling points.

The company has also sought to replace other semiconductors in the iPhone, including a key component from Broadcom Inc. Like Qualcomm, Broadcom counts Apple as its biggest customer. As part of the push, Apple has added staff to Southern California, where Qualcomm and Broadcom both have offices, in an effort to recruit chip talent. The company has teams working on new wireless chips in Cupertino, San Diego and Germany.

The new deal comes just a day before Apple’s biggest announcement of the year. The company plans to introduce the iPhone 15 as well as updated Apple Watches and AirPods at the presentation on Tuesday. It is confident that the products will help reverse three quarters of declining sales. The iPhone is Apple’s single biggest moneymaker, accounting for about half of its revenue.

Qualcomm, the world’s largest smartphone chip maker, has had a tumultuous relationship with Apple over the years.

Apple faced legal challenges against a central tenet of Qualcomm’s business model: charging licensing fees for the patents that guide the fundamentals of how wireless phone networks work. Apple eventually lost the battle and, like other major phone manufacturers, agreed to license Qualcomm’s technology. The arrangement is valid until 2025, and it can be extended by two years.

Because wireless carriers around the world use a wide variety of devices and standards, it is difficult to design a technology that works seamlessly. The modem chip must be able to establish a fast connection to the old 3G and 4G networks as well as the more modern 5G system. Since the advent of data-centric phones, Qualcomm has led the industry.

Although the new deal runs until 2026, Apple can still start using its own modem before then. The company has planned to introduce the component gradually.

In fact, Qualcomm only predicts that it will have a 20 percent share of the business when the 2026 iPhone is released. Still, the company used similar wording to the original deal, suggesting it could be a cautious forecast.