Apple Picks Intel for New iPhone Modem Chips, Diversifying Supplier Base

Order Is Shot in the Arm for Struggling Chipmaker

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Apple's next iPhone will use modems from Intel, replacing Qualcomm chips in some versions of the new handset, a move by the world's most-valuable public company to diversify its supplier base.

Apple has chosen Intel modem chips for the iPhone used on AT&T's U.S. network and some other versions of the smartphone for overseas markets, said people familiar with the matter. IPhones on Verizon Communications' network will stick with parts from Qualcomm, which is the only provider of the main communications component of current versions of Apple's flagship product. Crucially for Qualcomm, iPhones sold in China will work on Qualcomm chips, said the people, who asked not to be identified because Apple hasn't made its plans public.

Representatives for all of the companies declined to comment.

Orders from Apple represent the first major win for an Intel mobile chip program that had struggled for relevance and racked up operating losses. The shot in the arm for the world's largest chipmaker further dents the dominance of Qualcomm in baseband processors that connect phones to networks and convert radio signals into voice and data. While Qualcomm is losing some orders, it's retaining a major chunk of Apple's business, offsetting concern that one of its largest customers would drop it completely.

Intel reversed earlier declines and rose as much as 0.7%, to $32.15. The shares declined 7.3% this year through Thursday. Qualcomm fell as much as 2.9% to $53.40. It had been up 10% so far this year.

AT&T will sell an estimated 22 million iPhones this year and 23 million in 2017, according to Walt Piecyk, an analyst at BTIG LLC. Verizon, which has a slightly smaller iPhone user base, will sell an estimated 21 million iPhones in 2016 and 22 million next year, Piecyk estimates. Apple sold more than 231 million units globally in fiscal 2015. The next version, due for release this fall, is expected to be called iPhone 7.

Infineon Technologies AG provided the modem in the original iPhone in 2007. Infineon's wireless division was later acquired by Intel and Intel lost the contract when Apple chose Qualcomm for subsequent versions of the phone that offered high data rates. Since then, Intel's chip has failed to show up in any smartphone that has sold in significant numbers and the company has gained less than 1% market share.

Choosing Intel's part for an important role in the product that generates about two-thirds of Apple's annual revenue may represent a calculated gamble by the company. Bringing in second-source suppliers is a long-established practice by device makers looking to make sure they're in a better position to negotiate on price. However, analysts such as Stacy Rasgon at Sanford C. Bernstein have said that Qualcomm's modems remain ahead of Intel's offerings in performance when measured by how much data they can get from the network into the phone.

Rasgon estimates that Qualcomm gets about $15 per phone from Apple, or about $3.47 billion in Apple's fiscal 2015.

Qualcomm Chief Executive Officer Steve Mollenkopf told analysts on an earnings conference call in April that he was assuming that a major customer would switch to multiple suppliers. Qualcomm's other major customer is Samsung Electronics which already uses multiple component providers for its phones. Mollenkopf said his company's chip business performance will continue to improve in the second half of 2016 regardless.

-- Bloomberg News

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