Apple’s Biggest Chip Challenge: Replacing Qualcomm Modems

Apple Inc. has grown into a powerhouse over the past decade, beating some of the semiconductor industry’s biggest companies at their own game. But the iPhone maker is embarking on its biggest challenge yet, trying to replace Qualcomm Inc. cellular modems with its own design.

Qualcomm fell more than 7% to $144.28 on Friday, its biggest drop since June, after Bloomberg announced that Apple had started developing its own modem this year. This reaction underestimates the task that awaits Apple in the years to come, according to analysts. Some have even wondered if the Cupertino, Calif.-Based tech giant could be successful.

The question is whether and when Apple s initiative will be successful, said Chris Caso of Raymond James. “Apple’s potential for success in developing an advanced modem is by no means assured.”

Modems are one of the most critical components of an iPhone because they connect the device to cellular networks so that users can browse the web, access apps, and make phone calls. For it to work everywhere, it takes layers of specialized engineering and a wealth of industrial know-how that takes time to acquire.

Wireless operators build networks in different ways, using different radio frequencies and various equipment that must comply with local rules. Modems need to integrate with this diverse technology, while seamlessly reverting to older wireless systems. This complexity has increased with the ever increasing need for data and the technical tricks used to provide it.

This requires rigorous field testing. Qualcomm runs labs that mimic the environment any phone will experience anywhere in the world. Its engineers have worked with operators for decades to tune their systems and make sure everything works in sync. This knowledge and experience has acted as a barrier for other companies to break their grip on this lucrative part of the semiconductor industry.

“Despite Apple’s admittedly considerable expertise in semiconductor design, modems are tough beasts,” analysts at Bernstein Research wrote in a note to investors on Friday. “It took them 5-10 years to develop a viable PC processor, even with annual iterations on the iPad, and modems are likely to present a greater challenge.”

Qualcomm has another big advantage, according to Raymond James’ Caso. The company works with the wireless industry to develop cellular standards, which often allows its chips to be the first to bring new features to market. This has put Qualcomm ahead of other powerful challengers, including Samsung Electronics Co., which has developed its own in-house modem but still uses Qualcomm for some Galaxy smartphones, Caso said.

Yet Apple has faced and defeated powerful industry players in the past. The company has spent years designing its own PC processors to replace Intel Corp. in Macs. It has used its own main processors in the iPhone and iPad since 2010 with specifications that have long surpassed competing designs. Apple has also developed its own power management chips and wireless chips for location data, headphones, and the Apple Watch.

However, there is already some evidence that the modem challenge will be more difficult. Qualcomm’s technology, especially for 5G handsets, was so well regarded that Apple settled a massive patent lawsuit and struck a multibillion-dollar deal with the San Diego-based chipmaker to integrate its modems to the iPhone 12 5G range this year.

Another indication of the scale of the challenge comes from a major acquisition last year. Apple does not generally do large transactions, preferring to create its own technology. But in 2019, the company acquired Intel’s modem unit for $1 billion. Johny Srouji, Apple’s senior vice president of hardware technologies, said this week that the purchase helped the company quickly build the team of hardware and software engineers it needed to develop its own modem.

In 2018, Apple also opened an office near Qualcomm’s headquarters in San Diego, California, and began recruiting its engineers.

It could take several years, if not more, before Apple can switch from using Qualcomm for its complex iPhones, wrote Mike Walkley, a Canacord Genuity analyst, in a note to investors. “Qualcomm is several years ahead.”