Experts say that Intel had no choice but to sell its smartphone modem business to Apple for $1 billion, but it was still a lousy deal
- Intel is essentially giving its technology away by selling its 5G smartphone business to Apple for $1 billion, analysts say.
- Intel's smartphone modem business struggled to make headway against more successful rivals like Qualcomm. One analyst estimates that Intel was losing $1 billion every year from that business.
- That may have made Intel feel like it had to take the first serious offer that came along, say analysts - even if that offer was lower than projected.
- But giving up the failing business is a smart move for Intel, which expects the move to generate savings of up to $500 million.
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Intel is essentially giving its technology away in selling its failing smartphone modem chip business to Apple for $1 billion, but the chip giant had no choice in order to get rid of a thorn in its side, analysts say.
"At $1 billion, they are basically giving the IP away," Bernstein Research analyst Stacy Rasgon told Business Insider. Wedbush analyst Daniel Ives echoed this view in a note to clients: "The $1 billion is below the 'few billions' that were initially contemplated."
Under the agreement, Apple will acquire the majority of Intel's smartphone modem business. About 2,200 Intel employees will join Apple, as well as intellectual property, equipment and leases. The deal is expected to close in the fourth quarter of this year.
Analyst Rob Enderle of the Enderle Group said Intel found itself in a a "horrid bargaining position," against Apple, at a time when the chip giant is also struggling to regain its footing in other key arenas, particularly the data center market.
The big problem: Intel's smartphone modems simply weren't seen as being on the same par as those from Qualcomm and other smartphone component manufacturers. A lack of customers led to a big drag on the business, with Intel finally deciding to cut its losses and get out of the business earlier this year.
Ives said Intel's smartphone modem chip business "was at one point losing roughly $1 billion annually."
So when Apple came calling, Intel likely felt forced to enter into a deal - even if the price was lower than what executives and analysts alike were looking for. Still, the short-term frustration of taking a suboptimal deal may fade with the freedom that comes with removing this metaphorical albatross from around its neck.
"Intel's probably happy just to get out of it," Ragson said.
'No clear path to profitability'
The sale ends months of speculation on the future of that business after Intel surprised the tech world in April with word that it was getting out of the 5G smartphone-modem business. "It has become apparent that there is no clear path to profitability and positive returns," Intel CEO Bob Swan said then.
It was a stunning move from a dominant player in the chip industry, which is also known as a major technology powerhouse.
The announcement also turned the spotlight on Swan's background. He took over as full-time CEO only in January after serving as interim chief after the sudden departure of ex-CEO Brian Krzanich last year. Unlike most of Intel's past CEOs, Swan, who used to be Intel's chief financial officer, has a background is in finance, not technology.
However, some analysts have noted that Intel's problems emerged long before Swan took over, which caused the chip giant to fall behind in an important market, as it struggled to adapt to a changing tech landscape.
With the PC market shrinking, Intel has focused more on the more lucrative datacenter market. But it has recently wrestled with a slump in that market. Intel also has struggled with production issues and stiffer competition from rivals AMD and Nvidia. The sudden leadership change also didn't help.
"Intel is digging itself out of the hole … and this is part of that process," Enderle told Business Insider. "Now that Intel really doesn't have an interest in this space it makes sense to sell it."
Savings from the sale
And Apple was widely seen by analysts as the logical buyer. Buying the Intel business is key to Apple's 5G strategy, Ives said: "This a clear 'doubling down" on 5G which remains at the centerpiece of the company's smartphone future with these chip assets giving Apple further control over its supply chain and core chip design."
For Intel, the sale could give make it more profitable in 2020, Ives added.
In fact, on a call with analysts on Thursday, Intel also said it expects even bigger savings from the transaction. "We are now expecting 2019 savings from our modem exit to rise to approximately $400 to $500 million dollars from our earlier estimates of $200 to $300M dollars," Chief Financial Officer George Davis said.
Still, despite the bargain price, "Intel will be stronger after this is done and from their perspective, that'll be a good thing," Enderle said.
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