In an Intel vs Apple negotiation, Intel looked the underdog
After years of cooperation between Apple and Intel, the American mobile phone giant made the decision to source 5G modems from Intel’s rival, Qualcomm, rather than from Intel. This was a bad blow to Intel’s modem division, as Apple was not just Intel’s only existing customer but also their main prospect for the future.
Therefore, it was not surprising that Intel would consider exiting the market and selling off its mobile phone modem division. However, finding a buyer and securing a favourable price could be tricky: A viable 5G product was still some way off, their 4G performance was considered sub-par, and the operation reportedly cost a billion dollars per year to run, thus quickly raking up losses.
As Apple had just secured supplies from Qualcomm, they had no obvious need for the Intel division in the short term. Even if they were interested in building modems themselves in the future, they would not be under any time pressure, while Intel would be desperate to off-load a loss-making unit sooner rather than later. Apple therefore would seem to have the upper hand in any price negotiation for Intel’s modem division.
Despite this, the Intel division and its various modem-related patents sold quickly for 1 billion dollars to no one other than Apple.
How did Intel sell a loss-making division without customers nor products to someone who just bought all the products they could possibly need from someone else?
Sometime after Apple announced its deal with Qualcomm, Intel publicly announced that it would auction off its stock of phone modem related patents. They went as a far as appointing an auctioneer already. But shortly later, Intel again made an announcement – that the auction had been cancelled and that Intel was in bilateral talks with a counterparty which would turn out to be Apple. These bilateral talks then turned into a finalised deal very quickly indeed and concluded barely a month after the auction had initially been announced.
The quick conclusion suggests that the bilateral negotiations between Apple and Intel had been ongoing for some time already, but probably stalled. To understand the succession of auction announcements and turnabouts and the outcome of the bilateral negotiation we first need to look at some other negotiations that Apple is also engaged in.
The market for phone modems has been in the grip of Qualcomm for a long time. To strengthen its position in commercial negotiations with Qualcomm, Apple needed a second source as a credible alternative. Indeed, it looks like the original contract between Apple and Intel for 4G modems was aiming at exactly that – building an alternative to Qualcomm. Why else would Apple have put up with an inferior modem and risked a fallout and consequent multi-billion-dollar lawsuit with its erstwhile partner Qualcomm?
Presumably, Apple benefited nicely from its dual sourcing strategy and would have liked both Qualcomm and Intel to stay in the modem market. The two technology firms would drive innovation and bear the costs of developing alternative modem solutions while Apple could play them against each other in commercial negotiations.
Unfortunately for Apple, Intel could not deliver a 5G modem in time for the iPhone X’s successor and Apple had to change tack. Apple settled its lawsuit with Qualcomm for 4.5 billion dollars and signed a multi-year agreement for future modems.
At this point Apple’s preference still would have been to keep Intel in the market. But if Intel were to withdraw from the market, Apple would have to look at inhouse development to avoid falling back to dependence on Qualcomm. Indeed, Apple hired Intel’s lead 5G developer shortly before signing the deal with Qualcomm, which suggests that they might have been anticipating an Intel exit and were contemplating an inhouse alternative to Qualcomm – at least for the time after the multi-year agreement with Qualcomm runs out.
Seeing the bigger picture, Intel cranks up the negotiation pressure
Intel spotted this power struggle between Apple and Qualcomm and went on to leverage Qualcomm’s potential bargaining power in the future for its own negotiation with Apple.
Presumably, negotiations between Apple and Intel about a potential acquisition of the modem division had stalled at this point, as Apple could happily wait for a better price while Intel was still in the market and bleeding money. But then Intel announced an auction of its patent portfolio. This auction would clearly be second best for Intel compared to a bilateral deal with Apple. Selling the patents on their own would devalue Intel’s modem division even further and probably condemn the division to be wound up at further costs to Intel. But even though an auction might be second choice for Intel, its announcement fundamentally changed the dynamics of the bilateral negotiation.
Firstly, a de-facto Qualcomm dominance in the market becomes a real possibility again. Qualcomm would almost certainly not be interested in Intel’s modem division (even if competition authorities were to give their blessing for the acquisition). They would, however, be interested in preventing or delaying an Apple in-house solution if Intel were to leave the market. Denying Apple an inhouse alternative could easily justify acquiring the patents. The cost could be funded with cash from the Apple settlement and Qualcomm could anyway recoup them from Apple in their next commercial negotiation, where Apple would be stuck in a weak bargaining position for lack of alternatives.
Secondly, Intel’s announcement changes the default course of action in the bilateral negotiation. Rather than Intel being under time pressure to accept a low price and stop mounting losses, Apple now had to move quickly to prevent the auction. If Apple did not compromise, Intel would be bound to go into auction. Shareholders had been informed and an auctioneer appointed. Intel’s commitment to walk away from the bilateral negotiations suddenly became extremely credible.
For Apple the prospect of an auction was bleak. Either Qualcomm win and claw the money back from Apple in their next procurement negotiation, or Apple outbid Qualcomm for the patents but then might have to go back to Intel and buy the remaining division anyway to ramp up its inhouse solution quickly.
At that point Apple could just as well avoid all the uncertainty and meet Intel in the bilateral negotiation. Which, apparently, they did.
Seeing the whole market is key for successful negotiation in both corporate strategy and procurement
Negotiators who narrowly look at their own negotiation can easily undermine their own bargaining power. In contrast, game theory experts look at all the games, find the pivotal positions and turn them into an advantage in those settings where you otherwise might be vulnerable. Intel took a wide view and essentially borrowed Qualcomm’s potential power in future procurement negotiations for its own negotiation about a corporate acquisition.
For further commentary on the patent auction and Apple’s acquisition of the Intel division see here and here . For reporting on the legal and commercial struggles between Apple and Qualcomm see here and here .