Can Intel Corporation (INTC) Win The Wireless Game With 5G?

  • Intel would open up a new growth avenue if it cracks the 5G standard.
  • But this could be a challenge, and Intel would have to keep its costs low.
  • It would also have to develop a very competitive suite of wireless technologies for its 5G standard to be truly competitive.

Intel (NSDQ:INTC) has been very vocal about its plans for 5G domination lately. The semiconductor giant announced recently that it aims to begin 5G trials by 2018, with the ultimate goal of large-scale commercial deployment of the next-gen wireless standard by 2020. The chipmaker is hoping that its big push in 5G would allow it to enter the mobile SoC segment in a big way, one that its ambitious contra revenue program couldn’t deliver. Also, Intel is claiming that it has learnt from its past mistakes and that its next-gen 5G standard won’t suffer the same fate as WiMax. But let’s look away from PR statements, marketing material and bold claims for some time, and try to understand Intel’s prospects in the 5G segment to have a better and clearer understanding of it all.

A Huge Opportunities

  • Let me start by saying that the race for 5G domination isn’t just about who manufactures the most SoCs or IOT devices, but it’s also about who gets their 5G technology adopted as the default standard by all, or most, telecom operators. If Intel is able to get its 5G tech standardized, it would be in a position to charge a licensing fee from chipmakers such as Qualcomm, MediaTek or even Samsung for letting them use its 5G tech in their basebands. It can also charge a royalty fee from device manufacturers such as HTC and Motorola, as a small percentage of their devices' ASP, for letting them sell devices using its 5G radios. So it’s all about the end-game, where Intel gets to be at the helm of all companies utilizing 5G tech, and gets to collect royalty checks without requiring any significant, recurring R&D spend.

Also Read: Chips Delays Will Most Likely Drag Intel Corporation (INTC) Stock

  • I’d like to also point to readers that such a royalty-driven venture is highly profitable in nature; the royalty collection division doesn’t really have any significant operating expenses to water down its profitability after all. To put things in perspective, Qualcomm’s Technology Licensing division operates on the same premise and the segment was able to generate 74% operating profits for the company last year, even though it contributed just 31% in terms of revenue. I attached a chart below for reference. This goes to show that Intel’s profitability would vastly improve if it’s able to get its 5G tech standardized.


(Source: Author, Qualcomm’s FY15 Annual Report)

  • It’ll give Intel a strong entry into mobile, something it tried to achieve with its contra revenue program for mobile SoCs. This way, in addition to owning the 5G standard and its associated royalties, Intel will also become a well-positioned supplier of mobile SoCs/basebands. The chipmaker would be in a position to optimize its hardware offerings that would work best on its 5G standards, so that should ultimately give it some sort of an edge over other baseband manufacturers. This can trigger the demand for Intel SoCs as well.

Screen Shot 2016-09-23 at 12.50.10 PM

(Source: Intel)

  • We all know that the next-gen 5G is geared towards improving the existing 4G standards. But in addition to that, it is also expected to impact the IOT segment in a big way, which in itself is expected to become a big market over the next few years. Gartner projects that the number of IOT devices will grow exponentially from 6.4 billion in 2016, to 21 billion by 2020. This explosive growth would naturally be accompanied by a rapid increase on IOT-related market spend. So Intel has a chance to operate in a huge, yet swiftly growing market, if it manages to dominate the 5G arena.
  • Let’s try to estimate the financial returns from this IOT segment alone from the standpoint of royalty revenue collections for Intel. Let’s say that the average selling price of IOT devices in the year 2021 is $60, and that Intel charges a royalty fee of 1.5% on the ASP of all retailing 5G enabled devices, it’s royalty collections would aggregate to $18.9 billion just for FY21 alone. This is just a rough calculation and actual collections could vary by a significant margin. But the point that I’m trying to make here is that the IOT segment could be a huge growth avenue for Intel, if it plays its cards right.

($60 * 1.5% * 21 billion) = $18.9 billion  (a rough estimate for reference only)

But There Are Risks

Now that we have discussed the good and the rosy part, let’s take a look at some of the very real challenges that Intel could face in its ambitious goal of global 5G domination.

  • First of all, as I’ve mentioned earlier, 5G will be an upgrade to the existing 4G platform. In most cases, it’s a relatively cost effective option to upgrade any technology compared to building an entirely new platform from scratch. I’m of the opinion that this very rationale could work against Intel. Qualcomm currently dominates the 4G space. So Intel would have to work very hard to bring its 5G upgrade costs down for telecom giants. Otherwise, Qualcomm might beat it yet again.
  • Secondly, Intel would be building its 5G standards from scratch; it doesn’t have any industry-leading expertise or IP to lead the wireless segment. So, theoretically speaking, Qualcomm would be at an advantage in this aspect. The latter is a trusted name in wireless circles, with its technology found in most of today’s smartphones. So telecom operators might be inclined to side with Qualcomm for this very reason if technological and financial differences between the two competitors’ offerings are marginal.

Also Read: Should You Buy Intel Corporation Stock After The Movidius Deal?

  • And lastly, Intel may not be able to apply its contra revenue scheme to boost the adoption of its 5G standard by telecom circles. The investments required to upgrade or set up a new wireless standard for adoption by telecom operators are huge, and might run into several hundred billion if added internationally, so Intel may not necessarily be able to fund a contra revenue program of this size.

Putting it all together

I believe that Intel has a shot at 5G, but the cost of setting up its 5G standard will have to be low, or at least similar to upgrading from Qualcomm’s 4G to 5G platform. This could be a big challenge for Intel. But if it manages to find a solution to this problem, it’ll open up a massive growth avenue for the Chipzilla. I suggest that readers keep a close eye on Intel’s 5G related announcements going forward.

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