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Following years of speculation, Intel (NASDAQ: INTC) finally made its way back into Apple's (NASDAQ: AAPL) iPhone this year, an incremental negative to previously exclusive modem supplier Qualcomm (NASDAQ: QCOM).
Over the past few weeks, there has been a bit of controversy over the different iPhone models. First, CellularInsights noted in October that iPhone models with Intel modems performed worse in LTE speeds than models with Qualcomm modems. The difference exacerbates dramatically as signal strength weakens. This wasn't entirely unexpected, as Qualcomm has always been the top dog in cellular baseband modems.
Then there were reports that Apple was purposefully limiting certain iPhone models in an effort to make this difference less noticeable, essentially handicapping Qualcomm models. Even if Apple wasn't throttling speeds intentionally, it's more likely that the company simply may have chosen not to enable some features that would have unlocked higher speeds on certain networks to make performance more comparable across models.
Regardless, the point is that Intel modems simply aren't as good as Qualcomm modems.
Word on the Street
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If Intel can't catch up with Qualcomm in terms of modem performance, at least one Street analyst thinks that Apple might go back to single-sourcing modems from Qualcomm. Northland Capital Markets analyst Tom Sepenzis (via Tech Trader Daily) thinks it's a distinct possibility that Qualcomm recaptures the modem slot all for itself within the next two years if Intel can't close the performance gap. Sepenzis notes that Qualcomm's modem can deliver speeds of 600 Mbps, while Intel's maxes out at 450 Mbps. To the point, Intel's next-generation modem also maxes out at 450 Mbps, while Qualcomm's next-generation modem is capable of delivering impressive 1 Gbps speeds, the first of its kind.
That suggests that the performance gap is going to get bigger before it gets smaller, which further underscores the possibility that Apple might ditch Intel for iPhone modems.
Is it worth it?
Apple's decision is more complex than just looking at performance, though. For starters, that level of performance definitely goes unnoticed by the average consumer, and many wireless networks don't even approach those theoretical maximum limits under real-world conditions. Researchers and pundits noticing the difference under laboratory settings is one thing, but the average iPhone buyer doesn't know -- or particularly care -- what brand of modem is within their device. The benefit of switching back to Qualcomm entirely just so the iPhone can reach theoretically higher speeds on paper is dubious.
Meanwhile, Apple is presumably using dual-sourcing to reduce its costs. Having two suppliers always affords leverage, and you can bet that Intel bid aggressively to get the partial design win. It's also not a stretch to imagine Apple using this leverage to negotiate favorable volume pricing from Qualcomm. While we'll never know the details around these negotiations, this should all be common sense. Apple is infamous for pinching suppliers, and that's much easier when dual-sourcing. Any overall cost reductions that Apple can realize in this way directly translates into better gross margins.
Additionally, diversifying suppliers also de-risks the supply chain should one supplier run into any problems.From a technical perspective, Apple would pick Qualcomm if specs were all that mattered. But the strategic value of dual-sourcing shouldn't be understated.
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Evan Niu, CFA owns shares of Apple. 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.