This column originally appeared on Feb. 24 on Real Money, our premium site for active traders. Click here to get great columns like this.
One of the several allegations levied by Apple (AAPL - Get Report) and antitrust regulators against Qualcomm (QCOM - Get Report) in their recently launched legal battles against the company is that Qualcomm used its massive chip business to prop ups its even-more-lucrative IP licensing business by threatening to refuse to sell chips to phone makers that didn't agree to its licensing terms. Since Qualcomm has a near-monopoly position in the 4G LTE and 3G EV-DO modem markets, Apple and others have argued, phone makers have had little choice but to agree.
In that particular respect, new mobile chip launches from Intel (INTC - Get Report) and to a lesser extent Samsung are welcome news for Qualcomm, since their feature sets give Qualcomm more ammo for its claim that its chip customers have plenty of alternatives. On the other hand, the launches could yield more pain for a mobile chip business that's already having a rough time.
Ahead of the Mobile World Congress trade show (it runs from February 27 to March 2 this year), Intel announced the XMM 7560, a new 2G/3G/4G modem chip that supports 1Gbps peak 4G download speeds and 225Mbps peak upload speeds. And Samsung announced the Exynos 8895, a mobile system-on-chip (SoC) that pairs an 8-core app processor with a modem supporting 1Gbps peak download speeds.
The XMM 7560, due to enter volume production early in the second half of the year, is built using a 14-nanometer Intel manufacturing process that's much more advanced than the 28-nanometer process (believed to be Taiwan Semiconductor's (TSM - Get Report) used by the prior-generation XMM 7480, as well as the XMM 7360 modem used in some iPhone 7/7-Plus units. Moreover, its peak download speed easily trumps the 450Mbps claimed by the 7480 and 7360, and it supports 5x carrier aggregation as compared with the 7480's 4x and the 7360's 3x.
Just as importantly, the XMM7560 is the first Intel modem to support the 3G EV-DO networks still used by Verizon (VZ - Get Report) , Sprint (S - Get Report) , China Telecom (CHA - Get Report) and a smattering of other carriers. That, together with the chip's improved performance, leave Intel well-positioned to grab more iPhone share this year from historical supplier Qualcomm, whose modems are still used in iPhone units requiring EV-DO support (among others).
And Apple's already-bitter dispute with Qualcomm naturally gives the company an incentive to lower its dependence on Qualcomm as much as possible. Susquehanna, which estimates Qualcomm supplies 50% to 70% of the modems used in iPhone 7 shipments, thinks Qualcomm would lose $1 billion to $1.4 billion in annual revenue if Apple began relying solely on Intel. Intel, meanwhile, would gain $800 million to $1.1 billion (the difference stems from the fact Intel's modems are believed to carry a lower average selling price).
The Exynos 8895 relies on Samsung's cutting-edge 10-nanometer process, which is also being used to produce Qualcomm's flagship Snapdragon 835 SoC. Its modem supports more advanced carrier aggregation (5x vs. 3x) than the one found in the prior-gen Exynos 8890 SoC, and its peak download speed outdistances the 8890's 600Mbps.
Both the 8895 and the 835 are expected to be used by Samsung's Galaxy S8 when the flagship phone launches this spring, just as the 8890 and Qualcomm's Snapdragon 820 SoC are both used by the Galaxy S7. Qualcomm's decision to have its flagship SoCs produced by Samsung rather than historical foundry partner TSMC seems to be part of a quid pro quo through which Qualcomm gets to continue handling a portion of Samsung's high-end mobile processor needs.
But the fact that Samsung is getting pretty good at developing powerful 4G modems to pair with app processors that (judging by benchmarks) are fairly competitive with Qualcomm's gives it some leverage going forward. The company could ultimately limit the use of Qualcomm SoCs to high-end phones needing EV-DO support, or perhaps it could demand price concessions or more foundry work to maintain the status quo.
It should be noted that Qualcomm had its own product announcements to make this week. Among other things, the company unveiled the Snapdragon X20, a modem supporting 1.2Gbps peak download speeds and 5x carrier aggregation. But the chip won't ship in commercial hardware until the first half of 2018, which means it won't go into this year's Apple and Samsung flagship models. Until then, Qualcomm will have to get by with its Snapdragon X16 modem (1Gbps, 3x carrier aggregation), which is both sold on a standalone basis and built into the Snapdragon 835.
Intel and (perhaps) Samsung's launches could spell additional near-term pressure for a Qualcomm chip unit whose MSM chip shipments (a catch-all phrase covering modem, app processor and SoC sales) fell 10% annually in the December quarter, and are forecast to drop 2% to 13% in the March quarter. Apple's decision to start buying Intel modems has been weighing; so has slowing smartphone growth and competition from low-cost Asian rivals such as MediaTek and Spreadtrum.
The power consumption and die size improvements that the 835 delivers relative to the 820 should help Qualcomm's cause this year. As should the company's attempts to penetrate new markets -- unlike its predecessors, the 835 was built from the ground up to address not only smartphones/tablets but also various other devices (drones, VR/AR headsets, notebooks) requiring a lot of horsepower and low power consumption.
And of course, Qualcomm is about to spend $47 billion to buy top microcontroller/automotive chip supplier NXP Semiconductor (NXPI - Get Report) , a move that will meaningfully lower its mobile dependence
Meanwhile, Intel's plans to significantly cut its mobile R&D budget could make life easier for Qualcomm. At its recent analyst day, the chip giant guided for its mobile R&D spend to drop about 55% this year. However, it looks as if a portion of this spending decline is the result of job cuts that took place last spring, and (judging by 2016 product cancellations) targets Intel's struggling mobile app processor/SoC business rather than its standalone modem business.
Judging by the XMM 7560's specs, the R&D cuts haven't done much to damage Intel's modem competitiveness for the time being. This September's expected iPhone 7S and iPhone 8 launches should let us know just how much of a financial payoff Intel is getting at Qualcomm's expense for its remaining mobile chip investments.