Qualcomm Fell 8% on Friday after Apple Began Developing its Modem

In the last decade, Apple has become a chip powerhouse, beating some of the leading companies in the semiconductor industry at their own game. But the iPhone maker is embarking on its most significant challenge to date. Particularly, as it tries to replace Qualcomm’s cellular modems with its design.

Qualcomm fell 8% on Friday, its biggest decline since March after Bloomberg reported that Apple began developing its modem this year. According to analysts, that reaction minimizes the task Apple faces in the coming years. Some even questioned whether the Cupertino, California-based tech giant could succeed.

Chris Caso of Raymond James stated that the question is whether and when Apple’s initiative will be successful. Apple’s potential for success in developing a state-of-the-art modem is by no means assured.

A modem is one of the most critical components in an iPhone. It connects the device to cellular networks so that users can surf the web, access applications, and make phone calls. Getting this to work seamlessly everywhere requires layers of specialized engineering and extensive industry knowledge that are difficult to acquire.

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Wireless operators build networks in different ways, using different radio frequencies and equipment to comply with local regulations. The modem has to integrate with this diverse technology, while also leapfrogging older wireless systems with no problem. That complexity has increased with the growing need for data and the technical tricks used to provide it.

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This requires rigorous field testing. Qualcomm runs labs that replicate the environment any phone will experience anywhere in the world. Their engineers have worked with operators for decades to fine-tune their systems and make sure everything works in sync. That knowledge and experience have acted as a barrier for other companies to break their dominance in this productive part of the semiconductor industry.

Analysts at Bernstein Research wrote in a note that despite Apple’s considerable experience in semiconductor design, modems are challenging. It took them 5 to 10 years to develop a viable PC processor, even with annual iPad iterations, and modems are likely to present a more significant challenge.

According to Raymond James, Qualcomm has another significant advantage. The company’s licensing group develops and updates wireless industry standards, allowing its chip division to be the first to implement upgrades on silicon. That has kept Qualcomm ahead of other challengers, including Samsung Electronics Co., which has developed its in-house modem but still uses Qualcomm for some Galaxy smartphones.