[Apple Shockwave](24) 'Failure Again This Year' Apple’s Troubling Communication Semiconductors

Apple's Attempts to Develop 5G Modem Chips Fail Repeatedly
After Dropping Qualcomm Modem Chips, They Reunite
Challenges Due to Lack of 5G Communication Technology
Samsung Achieves Results After Over 10 Years of Efforts to End Qualcomm Dependence

Editor's Note[Apple Shockwave] is a content series that examines the upheaval caused by Apple entering the semiconductor market. You might wonder why Apple is involved in semiconductors. Apple is no longer just a company that makes smartphones and computers. After long efforts starting from its founder Steve Jobs, Apple has designed world-class semiconductors used in mobile devices. If Intel was the leader in the PC era, Apple has become the top predator in the mobile era semiconductor ecosystem. Amid the global semiconductor supply chain crisis and large-scale investments in semiconductor production facilities, we will carefully examine the upheaval and prospects in the semiconductor market brought about by Apple Silicon to broaden our readers' insights. Apple Shockwave will visit readers every Saturday. After more than 40 installments, it will be published as a book.

"Apple tried to replace expensive modem components, but only confirmed that Qualcomm is the king of 5G" - Investment media Seeking Alpha

Apple iPhone dominates the high-end smartphone market. Apple boosted sales by separating the high-end 'Pro' line starting with the iPhone X in 2017. The products sold as Pro lines in computers, iPads, and iPhones are characterized by differentiated core chips.

A representative example of 'tiering' is that the iPhone 14 uses the new A16 chip for the Pro grade and the A15 for the standard grade. Until the iPhone 13, the semiconductor performance gap between the Pro line and the standard iPhone was not significant. Those seeking cost-effectiveness chose the standard iPhone, which had similar performance but was cheaper. However, with the iPhone 14, it became difficult to choose the standard line for cost-effectiveness. The high-end line used a chip one generation ahead, while the standard line used the existing chip, widening the performance gap. If you wanted the latest performance chip, you had to buy the Pro.

In this way, semiconductors are a key factor determining the price of Apple products. Using expensive semiconductors to improve performance raises the finished product price. Conversely, securing similar performance parts at a lower cost can yield more profit. The same applies to semiconductors.

Apple also knows well that buying semiconductors externally is expensive. Therefore, Apple is developing semiconductors in-house. This maximizes both performance and profit. Compared to PCs that used Intel chips in the past, Apple MacBook computers using Apple M1 and M2 chips are considered cost-effective partly because semiconductor procurement costs are reduced. Developing semiconductors in-house and outsourcing production to TSMC costs less than sourcing chips produced by Intel.

However, there is one area where this formula does not work: communication modems. Despite continuous efforts, Apple has yet to achieve success here.

Wireless communication RF (Radio Frequency) modem chips are essential for smartphones. If the Apple A chip acts as the 'brain' operating the iPhone, the RF modem chip handles the phone's communication functions.

Although Apple has been developing core semiconductor components in-house one after another, the communication field is challenging. Unlike application processors (AP) that soared based on ARM's basic semiconductor design, there is no ARM equivalent for RF chips. Instead, Qualcomm stands as a barrier.

This is similar to how Samsung Electronics was dependent on Qualcomm's RF chips during the feature phone era. Even Samsung, which invested heavily in communications for a long time, found it difficult to break free from Qualcomm.

Qualcomm's 5G modem chip can be seen on the mainboard of the Apple iPhone 14. Photo by YouTube

This is the testimony of Jo Shin, former Chair of the Future Growth Power Planning Committee at the Ministry of Trade, Industry and Energy, and a communications expert. According to Jo, Samsung's first LTE modem, developed in-house, was installed in the Galaxy S3 LTE (Long Term Evolution) version released in 2012. Jo stated that although this did not attract much public attention, it marked a significant milestone in Korea's IT industry.

Dr. Jo said, "A modem is a core semiconductor chip necessary for wireless transmission and reception of voice and data. Samsung's decision to install its LTE modem in a premium smartphone and release it to the most 'demanding' domestic customers means they had confidence in its performance. However, it also felt like a declaration of war against Qualcomm, which had monopolized the domestic modem market since the commercialization of CDMA."

Qualcomm, once a venture company, established itself as a multinational communications semiconductor company by succeeding in commercializing Code Division Multiple Access (CDMA) mobile communications in Korea. Samsung Electronics made efforts to develop modems, but Qualcomm persistently pressured them. If Samsung did not use Qualcomm's modems, Qualcomm demanded higher royalties. Rebates were paid only if a certain percentage of modems were used.

Qualcomm is better known as a Snapdragon AP manufacturer besides modems. Since the smartphone's core competitiveness depends on the AP, Qualcomm led the Android camp alongside Samsung Electronics' 'Exynos' chip with Snapdragon.

Qualcomm, Unavoidable Even for Apple

Apple iPhone uses its own A chip. Apple does not need to use Qualcomm Snapdragon APs, but Qualcomm's cooperation remains essential. Without Qualcomm's modem chips, the iPhone could not be made.

Apple, led by Tim Cook, is well known in the industry for pressuring cost reductions. As a supply chain management expert, Cook is a 'master' at lowering suppliers' delivery prices and placing inventory responsibility on suppliers as much as possible. Apple, which bought parts from Qualcomm and paid royalties, started a lawsuit in 2017.

No matter how big Apple is, it must pay high costs to monopoly suppliers. Royalties are demanded repeatedly. As this situation continued, Apple excluded Qualcomm modems from the iPhone.

Intel refused to supply AP chips for iPhones and failed to enter the smartphone era but ventured into the modem business by acquiring the modem division of Germany's Infineon. Apple could not source modems from competitor Samsung. The choice was Intel's modems. The dispute between Apple and Qualcomm became an opportunity for Intel.

Most parts suppliers bowed to Apple’s strong market dominance, but Qualcomm was different. After two years of litigation, Apple gained little. Meanwhile, Samsung Electronics launched the first 5G smartphone Galaxy S10 in 2019.

Disputes cannot continue indefinitely. Apple and Qualcomm ended about two years of conflict and abruptly agreed to end their patent dispute in 2019. To open the 5G era for the iPhone, Qualcomm's modems were necessary. Qualcomm's modems were thus installed again in the iPhone 12. Apple finally joined the 5G era.

Building located in Irvine, California, where Apple's wireless semiconductor research lab will be housed.

In this process, Intel sold its modem business to Apple. Now the iPhone's modem also became Apple's responsibility. It seemed that modems, like the A and M chips, would soon be dominated by Apple. However, hope has not turned into reality.

The industry consensus is that the reason Apple has not released the 4th generation iPhone SE after launching the 3rd generation iPhone SE in 2022 is due to modems. Qualcomm's modem supply, which was expected to stop in 2022, continues. Qualcomm's predicted termination date for transactions with Apple keeps extending. This means Apple has not achieved results despite acquiring Intel's modem chip division. Qualcomm CEO Cristiano Amon also predicted last February that Apple would not develop its own modem by 2024. Amon's forecast for Apple's modem development timeline is delayed every year. Recently, investment bank Barclays also projected that Apple would secure a 5G modem no earlier than 2025. Even this timeline is uncertain.

Announcements that Apple uses Qualcomm modems come through Qualcomm. Apple does not comment on using Qualcomm modems. It is rare for Apple's parts suppliers to disclose that they supply products to Apple. This is possible only because of Qualcomm's dominant position in modem chips.

Apple is increasing its wireless modem-related workforce in the Irvine area of California, USA. Photo by Apple website

Apple is still continuing efforts to develop modem chips. Recently, Apple has been expanding its wireless development research organization in Irvine, Orange County, California, showing Apple's sincere commitment to modems. Apple already operates a wireless development-related organization in Orange County, but recently signed a lease for an additional building nearby and posted job openings to expand research personnel related to baseband modems.

The moment Apple completes modem chip development, Apple semiconductors will mark another milestone. Of course, if the opposite happens, communication semiconductor companies will be free from Apple's influence for the time being.