Vertical Integration vs Modularity : Case Study with the Apple C1 chip

Introduction

Apple’s C1 modem chip, introduced in the iPhone 16E, marks a significant step in the company’s long-term strategy toward greater vertical integration. While it may seem like just another internal hardware shift, it actually highlights a much bigger strategic question: When should companies develop in-house capabilities versus relying on external suppliers?

Apple has, and continues to rely on Qualcomm for its modem chips but Apple’s move away from Qualcomm’s modems is part of a broader trend we’ve seen before—whether in chip design, software, or retail stores. But is vertical integration always the right approach? What are the risks? And what does this tell us about Apple’s future?

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What Is Vertical Integration?

Vertical integration is when a company controls multiple stages of its value chain—whether it’s production, distribution, or retail. Apple has long been a champion of this strategy, designing its own hardware, software, and even managing its own retail stores to maintain control over the user experience.

In contrast, modularity is the opposite approach, where companies source standardized components from specialized suppliers. This method allows for lower costs, access to best-in-class components from vendors like Qualcomm, TSMC, or Samsung, and in some cases faster adaptability.

Apple’s history showcases both strategies: its vertical integration approach with iPhones (custom processors, iOS, App Store) led to huge success, while relying on Motorola and then Intel for its desktop and laptop chips arguably slowed down the company's progress --- it was clear by the mid 2010s that Intel could not deliver the performance that Apple wanted from its chips. When Apple moved away from Intel and used ARM-designed chips on its laptops and desktops, the company saw huge improvements in performance and energy efficiency that galvanised its struggling Mac division.

On the other side of the negotiating table, you have Qualcomm who work with the entire industry. Qualcomm's own product roadmap would include requirements from other manufacturers, not just Apple. So again, Apple would see itself as hostage to Qualcomm's development road map, that might hold its own roadmap back.

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Why Apple Is Moving Toward In-House Modem Chips

For years, Apple has depended on Qualcomm for modem chips, which handle wireless connectivity. Qualcomm dominates this market, with industry-leading technology and a stronghold over critical patents. Apple has long wanted to reduce its reliance on Qualcomm, not just for cost reasons but for greater control over power efficiency, performance, and integration with its ecosystem.

Apple’s acquisition of Intel’s wireless modem division in 2019 for $1 billion signaled its intent to develop an in-house modem. However, it has taken five years for Apple to introduce the C1 modem in a shipping product—illustrating just how difficult modem development is.

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First-order thinking

At face value, having an in-house modem means Apple can get some cost savings. It won't need to pay Qualcomm royalties for its modem technology which some estimates put at US$5-$6 per iPhone. For the best selling product in consumer electronics history that's a sizeable portion of Qualcomm's revenue.

However, Qualcomm's earnings won't be significant hit in the short term because Apple is only introducing the C1 in the iPhone 16E which isn't expected to be a big part of its sales. Apple is probably doing this to iron out any bugs in the C1 modem before it expands its use. Initial tests show that the C1 is very power efficient but lacks some of the capabilities in Qualcomm's chips, notably the C1 does not support the mmWave spectrum. This might not be a huge omission given that even in the US, only Verizon supports mmWave and only in a handful of locations with questionable reliability.

Nonetheless, we can foresee that Apple will roll out the C1 chips in more iPhones so the cost savings will be greater. We should also assume that Apple will improve its C series chips in the future, although we can't be sure they will match Qualcomm.

Second Order thinking

If we go one level below, we can think about the new capabilities that the C1 chip can bring to future iPhones. The modem is one of the big sources of battery drain in a phone. The C1 modem is optimized to improve battery life, a critical factor as Apple explores thinner iPhones (like the rumored iPhone 17 Air) and foldable devices. A thinner device means less space for the battery which inevitably leads to lower battery life. This is especially important for a foldable where the larger screen would also draw down more battery.

Apple wants to avoid dependency on Qualcomm’s development timeline and pricing, much like it did with Intel before switching to its own M-series Mac chips.

Third Order thinking : Apple's Long-Term Vision

If we go another level, we can think about what the C chips can do beyond smartphones:

- Cellular MacBooks – Apple has never included built-in cellular in their laptops. One issue could be the much larger data requirements of a laptop so a custom modem could enable the Mac Operating system to prioritise certain data tasks.

- Apple Vision Pro & AR Wearables – As Apple pushes into AR, having an efficient, custom modem could make devices like the Vision Pro, or even smart glasses, more portable and usable outside the home.

Postulating further, Apple might look at including the C modem chips directly on the existing System on a Chip (SoC) and get the same energy-performance benefits that their laptops and desktops got when the M series chips placed the memory on the same chip as the processor.

Challenges & Risks:

- Technical Complexity: Wireless modem technology is hard to get right. Qualcomm has decades of R&D in this space, and Apple’s first-generation modems, based on some early benchmark tests, don't match Qualcomm’s efficiency yet. It is not a certainty that Apple will match Qualcomm's technical capabilities even in the future because Qualcomm will continue to innovate.

- Regulatory & Legal Hurdles: Qualcomm owns a massive patent portfolio. Apple’s past legal disputes with Qualcomm over licensing fees suggest potential future conflicts. Apple also has to manage a large number of global technical regulators to get approval for their C series.

- Performance Concerns: If Apple’s modem underperforms in real-world scenarios—whether in crowded stadiums or weak signal areas—it could lead to customer dissatisfaction and damage Apple’s brand.

Final Thoughts

Apple’s shift toward in-house modem development is more than just a hardware upgrade—it’s a strategic decision with long-term implications. While vertical integration gives Apple more control and efficiency, it comes with significant risks, particularly in a domain as technically challenging as wireless connectivity.

This move isn’t just about cost-cutting—it’s about shaping Apple’s next decade of devices. The success of the C1 modem will tell us whether Apple’s bet on vertical integration pays off or whether Qualcomm remains indispensable.

What do you think? Is Apple’s modem move a smart play or a risky bet? Put your thoughts in the comments.