Apple lost the 5G battle, but it paid Intel $1 billion to win the war - CNBC

Tim Cook, chief executive officer of Apple, and Eddy Cue, senior vice president of Internet Software and Services at Apple, attend the annual Allen & Company Sun Valley Conference, July 10, 2019 in Sun Valley, Idaho.

Drew Angerer | Getty Images News | Getty Images

Apple may have lost the 5G battle to Qualcomm, but it's now in a position to win the war.

Apple said Thursday it will buy Intel's smartphone modem business, which includes several patents and about 2,000 Intel employees, for $1 billion. It's no secret Apple has been interested in developing its own modems for the iPhone, and buying up all that Intel IP puts it in a position to have one ready by the time its deal with Qualcomm runs out.

Apple had four bad options when it came to its 5G plans after it settled the royalty spat with Qualcomm in April:

Option one: Settle with Qualcomm and get its 5G chips into iPhones by 2020.

Option two: Wait for Intel to catch up with its 5G modems, which were said to be running behind schedule.

Option three: Choose Huawei's 5G modems, which would be a tough sell in today's environment thanks to trade tensions and cybersecurity concerns.

Option four: Make its own 5G chips, which would take several years and put Apple far behind other handset competitors that are already releasing 5G phones this year.

So Apple went with the least of all evils. It settled with Qualcomm and laid the groundwork for a long-term plan to develop its own modems. Meanwhile, Intel was forced to back out of its 5G modem plans once Apple and Qualcomm signed their deal, and its assets were relatively cheap and attractive for Apple to scoop up and get a head start on its own chips.

The move also plays into CEO Tim Cook's so-called Cook Doctrine, his desire to cut out third-party components in Apple products wherever it makes sense to do so. Given the expenses and headaches that come from working with Qualcomm, it makes more sense for it to start making its own modems.

In April's settlement, Apple agreed to use Qualcomm modems for the next six years, with an option to extend the relationship another two. That gives Apple up to eight years to perfect the smartphone modems Intel was struggling with and get them up to par with Qualcomm's technology. Even though Intel had a history of building modems that didn't perform as well as Qualcomm's, Apple now has plenty of time to improve the technology before the clock runs out.

Plus, Apple has a talented executive, SVP of hardware technologies Johny Srouji, on deck to make it happen. Srouji is the genius who turned Apple into a company that makes some of the best-performing mobile processors in the world. (In fact, Intel considered Srouji a candidate to be its next CEO, according to an Axios report earlier this year.) Now he'll get a chance to do the same with an equally important iPhone component.

But it's not going to happen immediately. Just because Apple will drop $1 billion on Intel's modem business this year doesn't mean it will have its own modems ready by 2020 or even 2021. This is a long-term initiative to become independent and control its own future in 5G.

Apple lost its first 5G chip battle, but don't be surprised if you switch on your new iPhone in six years and realize the company won the war.

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