Intel Corporation Should Fight Hard to Win Baseband Share at Apple Inc.

By Markets Fool.com

Early on in the world of smartphones, it was commonplace for smartphone vendors to use separate applications processors and cellular baseband modems. However, chipmakers such asQualcomm have aggressively pursued the integration of these applications processors with the baseband chips.

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Why do this? Here's what Qualcomm CEO Steve Mollenkopf said about the issue during the company's most recent earnings call:

Most of -- in fact without question every competitive solution is trying to get to an integrated space. Part of that is in order to compete in the marketplace, you have to fit within an area and a cost target that without integration very, very difficult to do. It's really only one OEM that doesn't do that and does that well. And they tend to play at a very high tier which gives you little bit more freedom not to do that. But the vast majority of units worldwide don't have that luxury. And so we tend to see everybody trying to produce integrated solutions.

In other words, besides Apple's iPhone and maybe a few high-end Samsung smartphone models, an integrated cellular baseband and applications solution is required.

What does Intel have to do with all of this?
Intel
has been aggressively developing cellular baseband solutions for stand-alone cellular chips and for integration with its applications processors. The company's latest XMM 7260 LTE-Advanced solution found homes in some variants of Samsung's Galaxy Alpha and Galaxy Note 4 smartphones, but Intel's low mobile group revenue shows it didn't exactly strike it rich from these deals.

Intel has also deployed its cellular baseband solutions in tablets (such as the Samsung Galaxy Tab S), and the company is talking about broader deployment of LTE basebands inside notebook PCs, but those, too, probably aren't enough to move the revenue needle for the chipmaker.

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So Intel could really use a high-volume customer for these (good and getting better) stand-alone LTE chips. The only potential customer that comes to mind is Apple, which KGI Securities analyst Ming-Chi Kuo predictedwill begin using Intel LTE chips at some point in the near future.

It's not as easy as "plug and chug"
I believe Intel and Apple would need to carry out significant software enablement work to support an Intel baseband in some models of the iPhone. This isn't just a case of Apple sticking an Intel modem chip inside the iPhone and calling it a day.

In fact, connectivity heavyweight Broadcom talked at length at its analyst day about how its position at the high end of the connectivity combo chip market was protected by a wide and deep software moat. Broadcom's Dan Marotta, head of Broadcom's broadband & connectivity group,even asserted that "in many cases the software is more complicated than the chip."

I'd imagine the same logic applies to cellular baseband chips. This isn't to say it's impossible for Intel to eventually supply baseband chips to Apple -- Intel has successfully provided baseband chips into Samsung phones -- but it's not as simple as "Intel has a good LTE chip, therefore Apple can just use it."

If Intel were competitive, it'd be good for Apple
If Intel can deliver, though, this would be a good way to get incremental revenue and gross profit flowing to its deep-in-the-red mobile and communications business. It would also serve as a validation of the company's cellular baseband efforts.

Additionally, as has been widely suggested, Intel seriously competing for a portion of the iPhone baseband orders would put Apple in a better position to negotiate price. Even if Intel didn't actually win any volume at Apple, a competitive offering from the chipmaker could force Qualcomm to reduce prices in order to keep the business.

Along those lines, Cowen analyst Timothy Arcuri suggested in a report published last June (via Barron's) that Apple has indeed "re-embraced [Intel] in a bigger way for discussions around the iPhone 7 (2015) but [Cowen analysts] continue to feel that this is ultimately more of a ploy to obtain pricing concessions from Qualcomm and [Apple] is ultimately unlikely to choose [Intel] for iPhone 7."

The article Intel Corporation Should Fight Hard to Win Baseband Share at Apple Inc. originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.