Apple Inc. Has 3 Baseband Options; Qualcomm Inc. Wouldn’t Like 1

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Rumors have been swirling that Apple Inc. (NASDAQ:AAPL) is coming up with a team to develop its own baseband processor, and such reports have sent jitters among Qualcomm investors, says a report from StreetInsider. Presently, Apple relies on Qualcomm for its baseband needs, and this contributes as much as 15%-18% to its sales, claims Nomura Securities analyst Romit Shah.

Is Apple running out of options?

The move from Apple Inc. (NASDAQ:AAPL) to create its own baseband processor makes sense, but manufacturing baseband is not easy, according to Shah. Despite the number of players in the market, only QUALCOMM, Inc. (NASDAQ:QCOM) offers a viable LTE solution.

According to Shah, if Apple Inc. (NASDAQ:AAPL) is planning to create its own baseband processors then the iPhone maker could face execution risk. Also, a foray in the segment would suggest that the Cupertino-based company is “running out of other customization options.”

Shah has listed three options, which he feels Apple might be considering for developing baseband:

100% in-house development most unlikely

First is the Data only in-house solution. In the baseband segment, voice and multi-mode operation present a lot of complexity. Therefore, developing a data-only solution, especially LTE, would be a much simpler task. Such solutions will only support iPads and MacBooks by reducing the cost of cellular connectivity and at the same time enhancing the popularity of the cellular based devices. However, if Apple Inc. (NASDAQ:AAPL) goes for this solution then the risk for QUALCOMM, Inc. (NASDAQ:QCOM) is limited as iPhone will not be covered.

The second option is to license Qualcomm IP to create a custom chipset. The possibility of such a scenario is also there as Apple has been working on radio optimizations technology to reduce power consumption, suggest the checks by the analyst. Shah believes that the iPhone maker could utilize the “customizations” to differentiate its devices further from Android. In such a case, Apple Inc. (NASDAQ:AAPL) would be licensing the baseband IP from QUALCOMM, Inc. (NASDAQ:QCOM), and then building on it. This scenario will not have much impact on Qualcomm’s earnings, as lower revenue will be compensated by a higher margin, believes Shah.

The third scenario is 100% in-house integrated baseband and apps / graphics processor. This scenario though allowing Apple Inc. (NASDAQ:AAPL) a wider scope for differentiation could also result in product delays and development failures. According to Shah, this is the most unlikely scenario as the segment requires high capital and involves a higher risk.

“We rank this in the order we consider most likely – Data only in-house solution, Hybrid – license Qualcomm IP to create custom chipset and 100% in-house integrated baseband and apps / graphics processor,” says Shah.

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