Continue Reading Below
Intelmight manufacture the LTE modem in select iPhones starting in 2016, accordingto a recent VentureBeat report. The new 7360 LTE modem will reportedly be installed in a variant of the iPhone for emerging markets across Asia and Latin America.
This would be a major victory for Intel over Qualcomm , which manufactures the LTE modem in current iPhones. Intel has been eyeing the wireless modem market for several years now. Back in 2011, it acquired Infineon, which manufactured 3G modem chips for the iPhone at the time. However, Apple stopped sourcing chips from Infineon shortly after that acquisition.
Therefore, a new partnership between Apple and Infineon would be a strong vote of confidence for Intel's struggling mobile business, which saw its operating loss widen from $3.1 billion to $4.2 billion between 2013 and 2014.
Why Intel needs the iPhone
Those steep losses were caused by "contra revenues," the subsidies Intel pays smartphone and tablet OEMs to switch from ARM -licensed designs to Atom-based ones.
Continue Reading Below
Those subsidies, which include co-marketing agreements, steep discounts on Atom chips, and financial assistance for redesigning logic boards, attracted several smaller mobile players like Lenovo, Asus, and Dell. Intel's new SoFia system-on-a-chip (SoC) can also be found in several mid-range smartphones for emerging markets.
Unfortunately, 95% of all handsets worldwide, including iPhones, still run on ARM-licensed designs. To expand its mobile footprint beyond CPUs and SoCs, Intel developed more wireless modems. However, Qualcomm still controlled 80% of the market last year, according to IDC, compared to Intel's 1% market share.
But if Intel's LTE modems permanently replace Qualcomm's modems in future iPhones for emerging markets, its market share would rise considerably. It could also hurt Qualcomm's ability to bundle complementary components -- such as the RF transceiver and various IC chips -- to Apple.
What does this mean for Intel?
VentureBeat's sources claim that Intel was willing to make "major" changes to get the LTE chips into iPhones, which might include higher levels of integration with Apple's A-series processors.
However, it also could mean that Intel was willing to sell Apple the LTE modems at lower prices than Qualcomm to reduce its bill of materials for an "emerging market" iPhone. If that's the case, selling the modems will boost Intel's mobile revenue -- which fell 85% year over year to $202 million in 2014 due to contra revenues -- but might not narrow the division's operating loss.
Intel plans to reduce its mobile losses by $800 million in 2015. To achieve that, it must reduce contra revenues. But as contra revenues fade, Intel's mobile partners could revert back to cheaper ARM-based designs. If that happens, Intel will need stronger sales of cheaper SoCs and wireless modems to pick up the slack.
What does this mean for Qualcomm?
It's easy to interpret Intel's possible LTE intrusion as bad news for Qualcomm, but investors should remember that the iPhone's popularity can be both a blessing and curse for Qualcomm.
As the iPhone's market share rose, so did sales of Qualcomm's LTE modems and RF transceivers. But those gains eroded the market share of rival device makers, many of which purchased more components and services from Qualcomm than Apple. Therefore, Qualcomm would actually benefit more from those bigger buyers marginalizing Apple than the other way around.
Nonetheless, losing big emerging markets in Asia and Latin America to Intel would hurt Qualcomm's revenue, especially if the smaller players can't keep Apple's growth in check.
Not a silver bullet
Intel's possible deal with Apple would definitely help its mobile business, but it's certainly won't pull it back to profitability on its own. In my opinion, the main benefit from this deal is that it improves the reputation of Intel's LTE chips, which could encourage Qualcomm's other longtime customers to switch over.
The article How Intel Corporation Might Profit From Apple Inc.'s New iPhone originally appeared on Fool.com.
Leo Sun owns shares of Apple. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple 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.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.