The generally reliable analyst Ming-Chi Kuo with KGI Securities recently claimed (via 9to5Mac) that Apple (NASDAQ: AAPL) plans to source the cellular modems that'll power the 2018 iPhone models exclusively from Intel (NASDAQ: INTC), cutting longtime Apple modem supplier Qualcomm (NASDAQ: QCOM) out of the mix.
According to Kuo, Intel's upcoming XMM 7560 LTE modem is good enough to meet Apple's needs, and Intel is apparently willing to price its chips more aggressively than Qualcomm will.
In this column, I'd like to go over why Apple's reported shift to using Intel modems exclusively could help the competitive positioning of Apple's next-generation iPhone models in the market.
It's not actually about the modem
The Intel modem itself won't help the competitive positioning of Apple's upcoming iPhone models. In fact, if anything, the bad publicity around the previous iPhone models that used Intel's modems instead of Qualcomm's could prove a slight negative in the marketplace (though I'd imagine that the vast majority of iPhone buyers don't know or care about any of that).
What the move to the Intel modem should do is reduce Apple's modem costs in the upcoming iPhone models. Apple can translate that cost reduction one of three ways.
The first is that Apple could pass the component cost savings on to the consumer -- Apple could sell what is effectively the same device but for a little less.
The second is that Apple could keep the component savings for itself entirely and keep selling prices flat, boosting its per-device profitability.
The third option -- and, in my view, the most interesting one -- is that Apple could use the savings from the lower-cost modems to improve capabilities elsewhere in the device. Most consumers don't know or care about modem technology, so if the use of a cheaper modem allows Apple to beef up capabilities in an area that customers do care about, such as the camera, then that'd be a win for Apple.
In that case, Apple would sell its devices for the same prices as it would have otherwise, and generate roughly the same per-unit profit margin as it would have otherwise, but it would be able to offer a more compelling product.
A more compelling product could ultimately lead to increased demand for Apple's products, boosting the company's overall revenue and profitability.
Ultimately, a product like the iPhone needs to be easily marketable to consumers. If the benefits of a new feature, technology, or component can be stated clearly to the consumer, and that benefit is compelling enough for the consumer to buy it, then it was probably worth adding.
Of course, the cellular modem is an important part of the smartphone experience. It's needed to allow consumers to transmit data quickly, and it enables high-quality phone calls. However, I don't think modem quality -- beyond a certain point -- is a reason to upgrade.
Things like camera quality, device aesthetics, battery life, and the size and quality of the screen are all arguably more important selling points. So, if Apple potentially sacrifices a little bit of modem quality and redirects the savings to making the other areas of the device better, then that's an obvious trade-off that Apple should be making every time.
10 stocks we like better than AppleWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Apple wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 2, 2018
Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.