PALO ALTO, U.S./TAIPEI -- Apple and Qualcomm on Tuesday reached a settlement to end a two-year multibillion dollar battle over patent royalties in a move which almost immediately prompted U.S. chip giant Intel to announce it was pulling out of the 5G smartphone chip market.
The two U.S. companies have been negotiating details of the settlement for weeks, sources told the Nikkei Asian Review. They have agreed to drop all litigation worldwide and struck a six-year licensing agreement, that will ensure the launch of the first 5G iPhone in 2020. The settlement included an undisclosed payment to Qualcomm by Apple, which several weeks ago asked its suppliers to begin testing the chipmaker's 5G modems, sources said.
Intel followed up news of the settlement by announcing its exit from 5G chips and raising questions over the future potential of the next generation technology, which the smartphone industry is hoping will help to revive a market suffering its third consecutive year of decline.
The U.S. giant told Nikkei Asian review in a statement that there was "no clear path to profitability and positive returns in the smartphone modem business. That said, 5G remains a strategic priority across Intel and we continue to invest in our 5G network infrastructure business." It also said it was reviewing opportunities for 4G and 5G modems in PCs, internet of things devices and other data-centric devices. It intends to continue to invest in its 5G network infrastructure business.
Apple has long been concerned that Intel could not meet its 5G schedule, perhaps prompting the settlement with Qualcomm. In June, Intel admitted to the Nikkei Asian Review that it had a "late start" in 5G.
Even with the Qualcomm deal, Apple will struggle to catch up with rivals who have already launched 5G models.
"It is too late for Apple to use Qualcomm's chips this year, but for 2020 it will purchase modem chips, including 5G modem chips, from the chipmaker for iPhones after finalizing the deal," a source with direct knowledge of the settlement plan told Nikkei.
Intel has been the sole modem chip supplier for iPhones since 2018, owing to Apple's legal dispute with Qualcomm.
"Apple had been a little concerned whether a sole supplier for modems could affect the company's plan to introduce its first 5G smartphone next year," a person familiar with the matter said.
Shares in Qualcomm closed 23.2% higher Tuesday on news of the settlement, while Apple remained flat.
The financial terms of the proposed settlement are unclear. But in the U.S. lawsuit, Apple along with major suppliers Foxconn, Pegatron, Wistron and Compal Electronics were seeking up to $27 billion in damages from Qualcomm, alleging years of overcharging for chip royalties. Foxconn trades as Hon Hai Precision Industry.
Qualcomm had accused Apple of forcing its suppliers to withhold about $7.5 billion royalty payments and was seeking a penalty up to $15 billion or more.
Apple CEO Tim Cook and Qualcomm CEO Steve Mollenkopf were expected to testify in the U.S. Southern California District Court in San Diego this week, in what was described as perhaps the biggest courtroom showdown between tech companies in decades.
Apple last year saw its first decline in annual iPhone shipments and watched Chinese rival Huawei Technologies pull nearly even in global smartphone volume. While Huawei and Samsung Electronics are releasing their 5G phones this year, Apple's legal dispute with Qualcomm had left Intel as the sole supplier of 5G modem chips for next year's iPhones. This vulnerability provided an impetus for Apple to enter into negotiations on a settlement with Qualcomm, according to three industry sources familiar with Apple's plans.
Qualcomm has long led the supply of modem chips -- a crucial component that determines phone quality and data transfer speed. The San Diego-based company introduced the world's first 5G modem chip, the X50, back in 2016 -- almost two years ahead of Intel and Taiwain's MediaTek. It unveiled the more powerful X55 more recently.
Intel has trailed Qualcomm in the smartphone age, but the world's biggest maker of processors for PCs and servers is eager to catch up.
Intel has said that its 5G modem will be available in the fourth quarter of 2020. The settlement between Apple and Qualcomm could deal a setback to Intel, as Apple is the chipmaker's biggest smartphone maker client for its modem.
Meanwhile, Apple is also developing its own modem chips. But multiple sources said that the company is unlikely to start using its own chips before 2021 because of the high technical barriers and time-consuming testing by telecom operators in markets worldwide.