With the exception of a handful of people in the know, no one expected Apple and Qualcomm to agree to settle all of their global litigation this week, particularly not on Day Two of their latest trial.
The stakes were high. On the one hand, Apple’s AAPL, +1.09% challenge to Qualcomm’s QCOM, +9.60% business practices threatened the latter’s model of developing intellectual property through significant R&D investment and then licensing the technology to device makers. U.S. leadership in 5G and wireless communications was hanging in the balance. On the other, Apple was beginning to collect a string of legal defeats involving patent infringements that threatened its ability to keep selling popular iPhone models in some of its most critical markets.
To make matters worse, Apple and Intel’s reported struggles to produce a competitive 5G modem were beginning to cast a shadow on the iPhone maker’s ability become a 5G company anytime soon.
A settlement always seemed like the ideal solution to both companies’ problems, but most observers, including myself, expected the legal back-and-forth to go on a while longer. This settlement marks a major milestone on the road to the adoption of 5G technology that will enable a transformational wave of technological advancement.
Qualcomm is the obvious winner from the settlement. Its stock shot up 16% almost immediately, and its stock-market value rose more than $10 billion. What was less immediately clear was how it impacts others. In addition to Apple, Intel INTC, +3.81% , Huawei, Samsung 005930, -0.42% and the contract manufacturers like Foxconn 2354, +1.12% and Pegatron 4938, +0.33% all had a stake in the dispute as well, after all. Here’s what kind of impact it might have on them.
Apple: Last week I shared seven reasons investors should be wary of Apple. This settlement instantly fixes at least two of them. I believe Apple is better off now that it has settled its dispute with Qualcomm and entered into a new license and chipset agreement.
Without Qualcomm, the iPhone seemed to keep falling further and further behind its Android competition, and Apple’s other projects (autonomous vehicles, mixed reality and IoT) felt stalled. That isn’t all that surprising given that Apple was somehow trying to build complex connected products without a reliable 5G chip supplier). Apple is no longer forced to compete with a technological disadvantage, and this should open it up to both faster and more significant innovation in smartphones, mixed reality and autonomous vehicles. WINNER
Read: Qualcomm gets big windfall in surprise settlement, but Apple may have saved the iPhone from 5G doom
Intel: It is no secret that Intel was struggling to deliver the 5G chipsets that Apple had hoped for. This had fed speculation that Apple might not be able to release a 5G-capable phone until 2021, which would have been both an embarrassment for both companies and a real problem for Apple.
I expect Apple will start using Qualcomm 5G modems in 2020; as it is already April, I don’t think there’s time for 2019 iPhones to be equipped with Qualcomm chipsets.
While this settlement may seem like a problem for Intel, I think it is a blessing in disguise. For starters, Intel and Apple’s modem relationship was very small compared to their processor business. Intel confirmed these suspicions when it announced just hours after the decision that it is exiting the modem business. The modem business was a distraction. I believe this shift will free Intel to focus on what it does best again. Its focus will likely shift toward performance improvements in other more “core” aspects of Intel’s business — like the data-centric strategies that it announced just a week ago. The stock market agrees with me; the stock is up more than 4% Wednesday morning. WINNER
Contract manufacturers: This was a fight that contract manufacturers such as Foxconn and Pegatron never wanted to participate in. They were licensees in good standing. Their business is to manufacture products for Original Equipment Manufacturers (OEMs) and Original Device Manufacturers (ODMs), not to take sides. News of this settlement must have been met by a collective sigh of relief. WINNERS
Samsung and Huawei: I am coupling the Korean and Chinese technology giants here because this case may have a similar impact on both. Simply put, every day that Apple didn’t have access to 5G chipsets, their position in the mobile space grew stronger. While both Huawei and Samsung business models are diversified well beyond handsets, having 5G technology that Apple didn’t have access to provided them with a significant market advantage. Now that Apple will become a 5G company, and rather soon, their consumer-facing story becomes somewhat less compelling. LOSERS
The other big winners are 5G and, more broadly, the U.S. technology ecosystem. With Apple finally entering the 5G game in the next year or so, consumers will no longer have a reason to wait before buying 5G devices or subscribing to 5G data plans. And with Qualcomm, Intel, and Apple strengthened by this settlement, the U.S. stands a much better chance of maintaining a strong global leadership position in technology innovation and 5G than it did when the three companies were at each other’s throats. This makes all of these stocks appealing in the short run, but even more so for the long game.
Daniel Newman is the principal analyst at Futurum Research. Follow him on Twitter @danielnewmanUV. Futurum Research, like all research and analyst firms, provides or has provided research, analysis, advising, and/or consulting to many high-tech companies in the tech and digital industries. The firm doesn’t hold any equity positions with any companies cited.
