Apple Reportedly Unleashes Its Bait-and-Switch Trick on Intel

It happened last year with Dialog Semiconductor, the maker of power-management chips.

Apple Reportedly Unleashes Its Bait-and-Switch Trick on Intel

It risks becoming Apple's signature bait-and-switch move.

After years of developing technology with a supplier, the iPhone maker pulls the plug on the collaboration. It then buys up that business, which has limited prospects without Apple's custom, and continues the development in-house.

It happened last year with Dialog Semiconductor, the maker of power-management chips. This time it's the turn, remarkably, of Intel, the world's second-largest semiconductor maker.

Apple is in talks to acquire Intel's modem unit, technology website The Information reported on Tuesday. The news comes just two months after Apple said it would return to using those made by chipmaker rival Qualcomm - it exclusively used Intel modems in the most recent generation of iPhones. The day after the Apple-Qualcomm rapprochement, Intel announced its intention to quit the mobile connectivity business.

To be sure, Apple may be providing something of a soft landing for Intel. The Santa Clara, California-based company has invested billions in developing modems since acquiring the business for $1.4 billion from Infineon AG in 2011. Its revenue from adjacent client computing products, which includes the modems business, jumped by 33% to $3.8 billion in 2018. That represented 5.4% of total revenue.

Despite all its spending, Intel still lagged Qualcomm technologically. That in turn prompted tensions with Apple, according to The Information. Getting some remuneration for its pains will be a relief. It's reasonable to expect Apple to pay more than the $3 billion it spent acquiring Beats Electronics in 2014, its biggest-ever acquisition.

But you can't blame Intel if it feels a little used. As with many companies, Apple prefers to have a multi-supplier strategy where possible: playing them off against one another helps eke out lower component prices.

Intel's modem presence gave Apple a powerful bargaining chip, if you'll excuse the pun, in its two-year legal wrangle with Qualcomm over licensing fees. The moment that dispute was settled in April, letting the two firms resume their collaboration, Intel's strategic usefulness waned.

Semiconductors have become a development priority for Apple as it seeks both to gain a technological edge over smartphone rivals Samsung Electronics and Huawei Technologies, both of which have their own chips businesses, and reduce its bill of materials by bringing more capabilities in-house. Semiconductor research and development is one of the most capital intensive around, and Apple's R&D budget has more than trebled in the past five years.

What's more, by acquiring the Intel business, Apple may again be able to enjoy the same leverage over Qualcomm from which it has benefited in recent years. It's a win-win for the Cupertino, California-based firm and potentially for Taiwan Semiconductor Manufacturing, the firm which makes Apple's custom range of chips under contract. It might take some time to catch up, but it means Qualcomm won't have an indefinite clear run.

© 2019 Bloomberg LP


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