Apple extends an agreement to obtain modem semiconductors from Qualcomm for three more years, a sign that its ambitious effort to design the chips in-house is taking longer than expected. Qualcomm shares rose on the news.
The new pact will cover “smartphone launches in 2024, 2025 and 2026,” Qualcomm said in a statement on Monday. The companies’ agreement was set to expire this year and at the latest iPhone — with delivery on Tuesday — was expected to be one of the last to rely on the Qualcomm modem chip.
Instead, Qualcomm will maintain its lucrative position within Apple’s supply chain. That iPhone maker is Qualcomm’s biggest customer — accounting for nearly a quarter of revenue, according to data compiled by Bloomberg. And their relationship helps validate Qualcomm’s claim to have the best smartphone modem, a critical component that allows devices to connect to the Internet and make calls. Starting with iPhone 12 generation, the chip has supported faster 5G network.
“This agreement strengthens Qualcomm’s track record of sustained leadership across 5G technologies and products,” the San Diego-based chipmaker said. Although the financial terms of the new agreement were not disclosed, Qualcomm said it was similar to the previous agreement signed in 2019.
Qualcomm shares rose more than 8 percent in premarket trading in New York on Monday. Apple rose less than 1 percent.
For Apple, the move suggests that building a modem component has been more challenging than expected. The effort has been underway for years. The Cupertino, Calif.-based company started the project in 2018 and then bolstered it with the acquisition of Intel Corp.’s smartphone chip business in 2019.
In 2020, Apple heralded the development of its own modem as a “key strategy transition.” Johny Srouji, its chip chief, said at the time that work was full steam ahead.
Some analysts expected the component to be ready for the 2023 iPhone, but Qualcomm dismissed that speculation last year. Apple was still looking to ship the modem either in late 2024 or early 2025, Bloomberg News previously reported. Now the project has a longer runway before it has to be ready.
It’s been a difficult task: Apple needs a chip that can connect to different mobile networks globally without fail, while offering as good or better performance than Qualcomm. It has run into battery life issues and there are bureaucratic challenges such as certifying the modem with authorities.
The company’s internal chip push — branded as Apple silicon – has had more success elsewhere. Apple replaced Intel processors in its Macs over the past three years without much issue, and the battery life and performance gains of these machines have been a selling point.
The company has also been working on replacing other semiconductors in the iPhone, including a key Broadcom part. Like Qualcomm, Broadcom counts Apple as its biggest customer. As part of the push, Apple has staffed Southern California, where Qualcomm and Broadcom both have offices, with the aim of recruiting chip talent. The company has teams working on the new wireless chips in Cupertino, San Diego and Germany.
The new deal comes just a day before Apple’s biggest announcement of the year. The company is set to lift the veil on iPhone 15and updated Apple Watch models and AirPods, at a presentation on Tuesday. It expects the products to help reverse a sales slide that has lasted for three quarters. The iPhone is Apple’s biggest moneymaker, accounting for about half of its revenue.
Qualcomm, the world’s largest manufacturer of smartphone chips, has had a turbulent relationship with Apple over the years.
Apple fought legal challenges against a key tenet of Qualcomm’s business model: charging licensing fees for patents that govern the fundamentals of how wireless phone networks work. Apple eventually lost that battle and, like other major phone makers, agreed to license Qualcomm’s technology. That arrangement runs until 2025, with the possibility of extending it by a further two years.
Because wireless carriers around the world use a wide variety of equipment and standards, it is difficult to design technology that works seamlessly. A modem chip must be able to quickly connect to older 3G and 4G networks as well as more modern 5G systems. Since the advent of data-centric phones, Qualcomm has led the field.
Although the new contract runs until 2026, Apple could still start using its own modem before then. The company has planned to gradually roll out the component.
In fact, Qualcomm only expects it to have a 20 percent share of the business when the iPhone 2026 launches. Still, the company used similar wording with the original deal, suggesting it could be a conservative forecast.
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