Will Apple Inc. Integrate Intel Corporation's Modem Tech in Future A-Series Processor?

By Markets Fool.com

A wafer of Intel chips. Image source: Intel.

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After Apple's (NASDAQ: AAPL) recent iPhone launch event, it became clear that the iDevice maker had opted to use cellular modem chips from microprocessor giant Intel (NASDAQ: INTC) for a solid portion of the iPhone 7 and iPhone 7 Plus models.

Interestingly, in the wake of the launch event, analyst Tim Arcuri with Cowen and Company speculated (via Barron's)that, at some point in the future, Apple and Intel could deepen their collaboration. In particular, the analyst thinks Intel could license its modem technology to Apple for integration into a future A-series processor. That integrated processor, then, would be manufactured by Intel.

Is such a scenario likely any time soon? I would actually argue, "No." Here's why.

The amount of risk Apple would take in this scenario would be much greater

The risk that Apple took on by using an Intel modem for the iPhone 7 is fairly minimal. Had Intel failed to deliver with the modem, Apple had a perfectly acceptable backup solution: simply launch the Qualcomm (NASDAQ: QCOM)-powered iPhone 7 into all regions.

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The modems in this case are discrete components and Apple has multiple potential sources, so the risk of a show-stopping issue related to Intel (a new entrant into the iPhone supply chain) was pretty much nil.

However, if Apple and Intel were to collaborate in the fashion that Arcuri suggests, the amount of risk the iDevice maker takes on becomes substantially greater.

First of all, in such a scenario, Apple wouldn't have two modem suppliers, it would have one. To be blunt, Intel's track record with respect to modems is getting better, but Qualcomm is still the "proven" supplier.

This means that if Intel hit a roadblock with its modem technology, it would derail Apple's launch schedule. Additionally, even if Intel executes as needed on the modem side of things, there would still be the risk associated with integrating that modem technology onto the same piece of silicon as Apple's A-series processor.

If something went wrong with that integration process it would, once again, force a delay in Apple's product launch schedule.

The risk doesn't end here, either. Apple has been using proven contract chip manufacturer Taiwan Semiconductor Manufacturing Company (NYSE: TSM) to manufacture its chips. Intel is a world-class manufacturer of chips, but to date it has only manufactured chips designed by Intel's in-house teams (and Intel still relies on third party contract chip manufacturers for some product lines, including the very modems that it's currently selling to Apple). It has not proven itself as a capable and reliable contract chip manufacturer.

So in this case, Apple moves away from a proven partner that has been able to ramp new technologies on schedule to a completely unproven contract chip manufacturer. This sounds risky to me.

This may be possible at some point far in the future, but not anytime soon

What Arcuri suggests might be possible at some point in the distant future. Once Intel has built a long and successful track record of delivering world class modems on schedule, and once Intel has proven itself as a contract chip manufacturer, then maybe such an arrangement would be possible.

However, such a deal -- were it ever to happen -- would very likely be many years away. Given the fast paced nature of technology, predictions going that far out aren't particularly useful.

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Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. 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.