The Ironic Weirdness of Apple and Intel vs. Qualcomm

I am not remotely religious, but recently it has become harder and harder to ignore that things have become incredibly ironic of late -- as if a divine being with control over the world decided to prank us.

For example, take President Trump. During the campaign, everything he made fun of others for doing -- including drinking water badly, playing too much golf, slacking off and slurring words -- he has done himself, in glorious living color. Also, he appears to be on a path that eventually will get him locked up. Given his "lock her up" theatrics at rallies, that would be incredibly ironic.

Kind of makes you want to walk into a church and yell, "OK, haha, very funny -- stop it already."

Thanks to the Trump administration, I am now sensitized to irony (in fact, I am anticipating it -- thus the "lock him up" prediction), and I am noticing a lot of it in the technology segment, where I live.

For instance, Brian Krzanich, after supporting the abuser side in the Gamergate scandal, announced he was going to be a huge advocate for diversity. Then he managed to force out or demote virtually every female senior executive who reported to him. No one seemed to say squat about his reverse-diversity diversity program.

However, the most fascinating and screwy thing I am currently watching is the litigation involving Apple and Intel vs. Qualcomm. It kind of took a Twilight Zone spin last week as the EU charged Qualcomm for something Intel was famous for -- locking out competitors.

In Intel's case, it was locking out AMD; in Qualcomm's, it was locking out Intel. So is this "what comes around goes around" irony, or something even stranger. I am going to argue the latter, so buckle up -- I think we have just taken a left turn into the Twi... er, Irony Zone!

I'll close with my product of the week: an interesting new set of noise-canceling headphones for, get this, business.

You Do Not Partner With Apple Twice

"You do not partner with Apple twice" seemed to become a common saying after Andy Grove, Intel's most iconic CEO, went off the rails about his deal with the company. It was not clear to me what Apple did to Intel and Andy, but he really hated the firm and, particularly, Steve Jobs.

Steve did have a reputation for screwing people over. He supposedly cut one of his closest friends out of Apple -- the guy had saved his life years earlier in India -- for daring to support Steve's then-pregnant girlfriend, whom Steve had cut off for refusing to have an abortion. (That likely was the reason Bill Clinton did not follow through with his promise to make Steve the Secretary of Education.)

Then there was his old partner Steve Wozniak, who reportedly actually cried when he found out his old friend cheated him.

In any case, Apple has the reputation for screwing over partners and, at least according to Andy Grove, really screwed over Intel.

So Intel partnering with Apple to go after Qualcomm kind of reminds me of The Scorpion and the Frog, with one difference: In the case of Intel and Apple, the frog and scorpion miraculously survived the first crossing -- but the scorpion then convinces the frog to do it again. Having been stung once, Intel should have no illusions about Apple's true nature.

Why Apple Will Screw Intel

If you look at what Apple is trying to do, it is trying to force Qualcomm to lower its price to Apple by a significant amount. The smartphone market is beginning to look like the PC market did a few years back -- slowing growth, increased competition -- and there is a tone of price pressure.

However, Apple's valuation is based on exceptionally high profit margins and revenue growth. Apple cannot seem to sell more products (the iPod is all but gone, the iPad is struggling, and the Apple Watch has fallen well short of expectations), so it must cut costs.

Apple initially tried to use Intel as a competitor to drive down Qualcomm's prices, but Intel's technology was so inferior that Apple decided to cripple Qualcomm's components in iPhones so that users would not figure out they were being screwed. Given that strategy did not work, Apple moved to litigation, arguing that Qualcomm's pricing was unfair.

Now, if Apple succeeds, Qualcomm will be forced to drop prices -- but Qualcomm still would have the better technology. So, ask yourself this, will Apple continue to buy inferior Intel parts, or flip to buying Qualcomm parts at near the same price? If the cost were the same, why would it continue to buy from Intel, given the Intel technology is not competitive?

Intel's Head Fake

Why is Intel even in this? It is not as if it really has any position in smartphones anymore. The entire strategy of building the modems in the first place was to better position its total solution (including processor) against Qualcomm's Snapdragon.

That did not pan out, though, causing Intel's board to seek a change in CEOs. Intel's processors since have been forced out of the market, leaving Apple buying Intel's modems as the firm's only major presence. However, as noted, Intel was supposed to be selling processors, not modems, and while these Apple sales allow Intel to argue it is in mobile, it really is not, given that its processor efforts have been dropped in that segment.

Apple designs its own processors in this space and is using Intel only to drive Qualcomm's prices down. That is tactical, and once this litigation is over, win or lose, Apple won't need Intel anymore. This short-term false perception is hiding an even bigger problem, though.

Intel's Bigger Problem

That bigger problem is that Apple has signaled that it eventually wants to move iOS to laptops, and there is no sign it will do so on Intel. In fact, Microsoft, looking at this same potential threat has collaborated with Qualcomm to create a new class of laptop -- the Always Connected PC.

If successful, Microsoft's effort could force Intel processors off its laptops and blaze the trail for Apple to follow. Intel, rather than expanding into mobile, now is looking at a future where the major part of its PC sales could be lost to ARM, both on Microsoft and Apple platforms.

This is even more problematic on Windows, because Microsoft currently is run by Satya Nadella, who is one of the top cloud advocates in the world, and the likelihood that future versions of Windows will be hosted is therefore a near certainty. With Windows 10 S, Microsoft has drifted toward a thin-client model, which is more ideal for ARM than x86.

So, as Intel screws around creating a false impression that it is competitive on mobile, it is at very real risk of losing the PC market -- not just laptops, either.

Apple Qualcomm

Now, Apple already had a sweetheart deal from Qualcomm. Its volume gave it a parts cost advantage over most competitors. (Volume licensing gives steeper discounts the more you order, and few order as many parts as Apple.)

However, if Apple's litigation were to succeed, Qualcomm would have to cut its prices to everyone and would be less than pleased with Apple, which suggests that some part of that advantage, if not all of it, would go away.

Because of the nature of the Android ecosystem (highly price-competitive) all of Apple's competitors must pass on savings to customers through price decreases, so this would put more price pressure on Apple to lower prices.

So even though winning would mean Apple's costs would go down, it would result only in a short-term margin advantage until competitors repriced. Apple then would be in worse shape than when it started, because its already-problematic end user price delta would become far more obvious.

Wrapping Up: The Weirdness

So, Intel is covering up that it has no sustainable mobile position as its PC position erodes catastrophically, and Apple is executing a strategy that will leave it in worse shape -- but that is not even the weirdest part.

I promised you real weirdness, and here it is. What Apple and the European Commission have alleged is that Apple got an added discount if it agreed to not use anyone else's modems. As I mentioned earlier, using this tactic is something Intel once was famous for, and what folks seem to forget is that Apple has Intel's old chief counsel working as its chief counsel.

So, who do you think it's more likely to have come up with the idea? Apple, whose top attorney embraced it as a regular strategy at his prior job? Or Qualcomm, which has no known history of using such a tactic?

It looks as though Apple sold the idea of these clauses to Qualcomm and then turned in Qualcomm to the EC for having them. It smells like entrapment blackmail, and it is clear that Qualcomm is not amused. This is why companies do not do business with Apple twice.

Netting this out: Apple is living on high margins and executing a strategy that should collapse those margins; Intel is collaborating with a firm that has screwed it in the past and that it knows will screw it again: and Qualcomm, a firm run by attorneys, is being brutalized by attorneys. I think that is irony cubed.

Rob Enderle's Product of the Week

I am kind of a Plantronics junkie -- I must be, because I am up to my ears in its products. They are all different products, though. For instance, I have one set of headphones for my desk, another for working out, and yet a third set for when I travel (which I have lost twice). With the new Voyager 6200 UC, Plantronics has created create one set of headphones meant to be used in all three implementations.