Apple is one of the largest manufacturers of mobile phones in the world. The company is the largest in the world and recently became the first one to cross the $1 trillion market capitalization mark.

The company has been recently engaged in a quagmire with Qualcomm, which is one of its suppliers. Finally, Apple had to settle the lawsuit and agree to Qualcomm’s terms. As a result, it is rumoured that the company is now planning to develop products independently of Qualcomm.

It is rumoured that Apple’s $1 billion acquisition of Intel’s modem business is just the first step in this direction. $1 billion might appear like a big amount for an average company.

However, it is not significant for a company like Apple, given the fact that this move is likely to reduce its dependence on Qualcomm and make them more independent.

This article provides details about the deal between Apple and Qualcomm. It also provides information about why Apple’s acquisition of Intel’s modem business is strategic in nature and hence will benefit the company in the long term.

Details of the Deal between Intel and Apple

Apple Inc. has agreed to acquire the modem business of Intel for a consideration of $1 billion. This includes all the intellectual property, physical property, equipment leases, and over 2200 employees. It is said that Apple had made the decision to build a new modem in-house after the Qualcomm debacle.

However, they figured out that going the greenfield way would cost a lot of time and money. This is the reason that they went the brownfield way and acquired Intel’s operations.

This acquisition will reduce the time required by Apple to increase its technological know-how. Apple is fully aware of the fact that the modem industry has huge entry barriers because of the high cost and technology requirement.

Apple already has deep pockets to offset the high-cost barrier. However, it still needs technology to be able to compete with companies like Qualcomm on an equal footing.

Why did Apple want to Develop an In-House Modem?

• Vertical integration is synonymous with Apple’s style of conducting business. Apple is one of the few mobile phone manufacturers which control both the hardware as well as the software which is used in their phones.

  The operating system, created and controlled by Apple, is one of the largest sources of competitive advantage for Apple. It is, therefore, obvious that Apple would want to reach the next stage of vertical integration.

  By doing so, it is likely to become a much more formidable force which would have more bargaining powers with their suppliers as well as consumers.

• Modems are one the most advanced, expensive, and sophisticated piece of hardware on a mobile phone. This is because modems regulate the speed of data transfer between cellular and other wireless networks. Also, modems are responsible for improving the battery life of the phone.

  Apple wants speed and battery life to be a source of competitive advantage. Hence, they want to build a modem which other companies do not have access to.

  This can only be done if the modem is built in-house. If Apple continues to purchase modems from Qualcomm, it is likely that Qualcomm may strategically withhold stock in order to jack up the prices. The Apple-Intel acquisition is likely to lead to further complications in the relationship between Apple and Qualcomm.

• Modems are going to be strategically important in the battle for 5G supremacy. For instance, an average 4G modem costs Apple about $18 for its iPhone series. However, 5G modems are likely to cost upwards of $50.

  Obviously, this price would reduce with the passage of time. However, these costs are still significant, and Apple would like to bring them under control. Developing modems in-house proves to be significantly cheaper.

  The acquisition of Intel chips would enable Apple to make better products which can also be priced competitively in order to weed out the competition!

Apple’s Relationship with Qualcomm

After the Intel modem acquisition, Apple has developed a love-hate relationship with Qualcomm, which is one of the largest competitors of the company. This is because Apple is still under a six-year contract, which makes it mandatory for it to buy at least some modems from Qualcomm.

Also, at the moment, Intel does not have a ready 5G modem. It is going to be a while before Intel can develop something which can be used by Apple. Hence, immediately kicking Qualcomm to the curb would do Apple more harm than good.

Qualcomm, on the other hand, is now completely aware that the partnership with Apple is no longer strategic or long-lasting. Hence, they are likely to raise the prices of their modems or even delay delivery to Apple so that the company is not able to launch their 5G phone in 2020!

The bottom line is that the impact of this mega acquisition will not be seen immediately. However, over the long term, Apple will be able to produce a better product at a lower cost thanks to this acquisition. Hence, the $1 billion spent by Apple on this acquisition is completely in line with Apple’s strategic values.