Why Apple Should Design Its Own Baseband Chips

by Trefis Team
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There have been reports that Apple (NASDAQ:AAPL) could acquire key parts of Intel’s German smartphone modem operations, as it looks to build its own 5G chips for the iPhone. Below, Trefis estimates the potential financial upside for Apple from designing its own modems and what it could mean for the broader iPhone business.

View our interactive dashboard analysis on How Could Apple’s Margins Benefit If It Designed Its Own Baseband Chips?

The Move Is In Line With Apple’s Strategy Of Shifting To Custom Silicon 

  • Apple currently uses Intel 4G chips on its flagship iPhones and plans to use Qualcomm chips for its 5G iPhones, which could launch by 2020 or 2021.
  • However, the company has been progressively using more self-designed chips on its devices, cutting its dependence on third-party vendors, as it looks to improve the performance of its products via tighter integration.
  • The in-house chip design team currently develops its A-series processors, wireless chips for audio products, and is increasingly focusing on power management.
  • Modems are one of the most complex and pricey parts of a wireless device, handing the transfer of data with cellular and other networks.
  • By developing proprietary modems, Apple could potentially improve wireless performance as well as battery life on its devices.

Modems Are Slated To Get More Expensive

  • Competition in the design and production of smartphone components is fairly limited, considering the high barriers to entry both in terms of technology and capital investments, and this means that components are getting more expensive.
  • While 4G baseband chips cost Apple about $18 for the iPhone X series per IHS Markit, 5G chips are expected to cost twice as much as 4G chips per JP Morgan, although we believe prices will decline with time.
  • By designing its own baseband chips, Apple could protect its margins and be less dependent on vendors such as Qualcomm.

What’s The Impact On Apple’s Gross Margins If It Introduces its Own 5G Chipset By 2024?

  • Trefis assumes that a third-party 5G baseband chip would cost ~$25 per unit in 2024 and we assume that Apple’s own chip could cost about 20% less.
  • This translates into a saving of about $5 per iPhone.

  • Assuming an average selling price of $740 per iPhone in 2024, we estimate that iPhone gross margins could expand by about 70 bps if Apple uses proprietary baseband chips.

  • We estimate that Apple’s overall gross profits could be higher by about $1.2 billion, assuming iPhone shipments of 230 million in 2024.

  • On a dollar basis, overall gross profits could be about 1% higher if Apple adopts its own baseband chips.

  • Overall, it’s safe to assume that a possible shift to proprietary modems would have more to do with product design and strategy than financial savings.

 

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