Qualcomm, the leading designer of modem chips that connect phones to mobile data networks, announced on Monday that it had signed a new deal with Apple to supply 5G chips to the iPhone maker until at least 2026. The deal is a sign of the strong partnership between the two companies, which had settled a protracted legal battle in 2019.
Qualcomm’s Shares Rise After the Announcement
The news of the extended supply deal boosted Qualcomm’s shares, which rose more than 8% in premarket trading on Monday. The stock has been under pressure this year, as investors worried about the competition from other chipmakers and Apple’s plans to develop its own modem technology. Qualcomm’s shares are still down about 10% year-to-date and have dropped by 18% over the past 12 months.
The deal is expected to provide Qualcomm with a steady source of revenue and profit from one of its largest customers. According to Qualcomm’s financial projections, Apple will account for about 20% of its chip sales by 2026. However, this estimate could be conservative, as Qualcomm had previously underestimated its business with Apple in 2021. The iPhone 14 models released last year all used Qualcomm modems, despite earlier projections that some of them would use Intel chips.
Apple Continues to Work on Its Own Modem Technology
While Qualcomm has secured its position as Apple’s main supplier of 5G chips for the next few years, it is not clear how long this relationship will last. Apple is known for its vertical integration strategy, which aims to reduce its dependence on external suppliers and increase its control over its products. Apple has been working on its own modem technology since it acquired Intel’s modem unit for $1 billion in 2019.
Apple has not disclosed how quickly it plans to ramp up the use of its own chips, but some analysts expect it to start in 2024. Apple’s move could pose a significant threat to Qualcomm’s dominance in the modem market, as well as its profitability. Qualcomm earns a large portion of its income from licensing its patents to other device makers, including Apple. If Apple switches to its own modems, it could reduce or eliminate the need to pay royalties to Qualcomm.
Qualcomm and Apple Maintain a Patent Licensing Deal
Despite the potential competition from Apple, Qualcomm and Apple have maintained a patent licensing deal that they signed in 2019, along with the initial chip supply agreement. The patent deal expires in 2025, but the companies have an option to extend it for two years. The deal allows Apple to use Qualcomm’s intellectual property in exchange for a fixed fee per device.
The patent deal was a result of a settlement that ended a bitter legal dispute between the two companies over royalty payments. The dispute lasted for more than two years and involved multiple lawsuits and regulatory investigations around the world. The settlement was seen as a win-win for both parties, as it allowed them to focus on their core businesses and avoid further litigation costs.
Qualcomm and Apple are expected to unveil their latest products this week, showcasing their 5G capabilities. Qualcomm will host its annual Snapdragon Tech Summit on Tuesday, where it will reveal its new flagship chip for smartphones and other devices. Apple will hold its iPhone event on Wednesday, where it will introduce the iPhone 15 models, which are rumored to feature improved cameras, displays, and battery life.