59 Comments

Summary:

Intel has announced new Atom Z6xx chips targeting smartphones and web tablets. The new chips don’t mask the fact that an innovator’s dilemma caused Intel to horribly miscalculate its mobile strategy. With strong competitors like Qualcomm, Intel looks like a mobile loser. Here is why.

Intel, as it’s wont to do, overnight made a splashy unveiling of a new family of processors: the Atom Z6xx series, whose chips are much more powerful than current versions but consume less power. Why the hoopla? Apparently these chips, which run at over 1.5 GHz, can be used to power not only smartphones but also tablets.

So as I usually do when a public company announces major news, I checked Intel’s stock price in pre-market trading: largely unchanged from its closing price the day before. If this was supposed to be such a big deal, why was the market ignoring it, and responding by shrugging its proverbial shoulders? Here’s why.

Future Shock

It reminded me of a piece of wisdom imparted to me by a friend of mine, a veteran of Wall Street. He says that investors pay for growth, and that anytime they express apathy towards a growth stock, they are pointing to a company’s inability to find new markets.   On the other hand, if they’re willing to overvalue a stock, then they believe that company is going to find newer markets to keep growing its revenues. Google and Apple fall into that category.

Chart forIntel Corporation (INTC).pngIntel’s stock performance over five years, as this chart shows, has been mostly flat to down. Much like Microsoft. Just as they have always been, the fates of the Wintel duopoly are still pretty intertwined. From the looks of it, both companies are going nowhere fast. Which is amazing considering that both companies still have a monopolistic control over the personal computer ecosystem.

Former Apple executive Jean-Louis Gassee, in a recent blog post titled “Very Personal Computing,” wrote:

The personal computer has reached the S-Curve’s shoulder while very personal computers are still at the S-Curve’s knee, poised for the type of growth the PC has enjoyed over the past 30 years…Apple, Google, and now HP have seen the past and the future: The PC business is mature and graying; the growth is with the new very personal computers. Relying on Microsoft (or even Google, unless you’re Google) for the operating system puts you in a fast race to the bottom, to meager margins, to having key decisions for your business made in Redmond or Mountain View.

The market has read the tea leaves as well, thus explaining the stock performance of Microsoft. Same goes for Intel. Despite its efforts to launch new chips or dabble in likely-to-fail OS efforts such as its joint venture with Nokia, the Mobilin, Intel resembles an elephant on top of quicksand.

Take its Atom Z6xx series announcement, for example. From a short-term tactical perspective, it will be months before these chips actually show up in phones on store shelves. It will be months before one of those phones gets any kind of traction, volume-wise. As for tablets — now even an optimist knows that would be a tough market to crack. In other words, don’t expect these new chips to have an impact on Intel’s bottom line anytime soon.

Mobile Chip Competition

Take a step back, and it becomes very clear that the company is facing competition from deep-pocketed, well-entrenched competitors — and they’re no pushovers. Because it had a monopoly on PC chips, and faced feeble competition in the x86 world, Intel managed to put its rivals out of business and maintain very fat margins, making it one of the most beloved stocks of the 1990s. Thanks to its overflowing coffers, it also experimented with different markets — networking and ultra-mobile processors (such as XScale) — by buying a lot of companies. All these attempts to expand beyond PCs and servers were schizophrenic at best.

Why? Because it couldn’t reconcile the future with these lower-margin products. As a company, Intel is addicted to the margins it gets from the PC and server markets. It needs those margins to keep its money machine going. But these are slow-growing markets. To wit, its own low-cost Atom processors are cannibalizing the core PC market, thanks to the growing popularity of netbooks at laptop replacements.

Anand Chandrashekhar, Intel’s senior VP and general manager of the Ultra Mobility Group, said: “Intel has delivered its first product that is opening the door for Intel Architecture (IA) in the smartphone market segment.” That is a shocking statement, and one that shows Intel’s long road ahead.

It’s an ARM’s (Mobile) World

IA is making its debut at a time when its rivals are firing on all cylinders. The ARM-based mobile application processor ecosystem is as crowded and vibrant as an Asian bazaar. From Qualcomm’s Snapdragon to Nvidia’s Tegra to Texas Instruments’ OMAP, the smartphone and tablet markets are very competitive. ARM-based chips are faster and consume a lot less energy. It will be at least a year before Intel can match them in the power department, analysts say.

Unlike in the PC market, where Intel’s best competitor was an anemic AMD, its mobile industry rivals are pretty cash-rich. And none is stronger than Qualcomm, which in many ways is a proxy on the fast-growing Android smartphone market. Qualcomm at the start of this century was quite aware it was losing its CDMA dominance and as a result started looking at new markets, so now it has a major head start over pretty much all its rivals.

The company has a minority stake in HTC, one of the largest smartphone makers in the world. It’s also been a major power player in the Android ecosystem and has very close relations with Google. More importantly, Qualcomm knows how to integrate application processors with mobile radios, thanks to a lot of in-house intellectual property and expertise — something Intel sorely lacks.

If Qualcomm is a fearsome competitor in the Android ecosystem, Intel is locked out of the Apple ecosystem. Apple has bet the farm on its internal chip technologies such as the ARM-based A4 currently being used inside the iPad. In the iPhone, ARM is the architecture of choice as well. Microsoft has started working closely with Nvidia’s Tegra and RIM’s devices, too, are ARM-based. Last month Hewlett-Packard agreed to buy Palm in a deal valued at $1.2 billion, and with that its own OS that runs on ARM — not Intel-based — chips.

History Repeating Itself

Many of us focus too much on the here and now, forgetting the lessons of history. Back in the day, IBM and Digital Equipment tried very hard to compete with PowerPC and Alpha chips, but couldn’t make a go of it against Intel’s dominant x86 platform. They failed because they were trying to reinvent the wheel.

The mobile ecosystem is pretty much the same — trying to go against the ARM ecosystem is trying to reinvent the wheel. ABI Research says that ARM-based ultra-mobile devices will surpass x86-based devices by 2013 because, as Stacey wrote, “ARM has always had an advantage in mobile because the chips based on the instruction set were designed to sip power rather than glug it. That translates into a longer battery life and presumably a smaller form factor for the battery and end device.”

Ashok Kumar, analyst with Rodman & Renshaw, put it best when he said:

They’ve publicly said that only in the next version of Atom–which is a 2011 event–will power consumption be low enough to truly address the smartphone market. That’s been the official positioning so I don’t know what’s changed. In terms of actually making a push into the ARM market, that’s likely to be a 2011 event.

To put it bluntly, it won’t be until next year that Intel will have a competitive offering on the market — an eternity in the mobile world. Too bad Intel sold its StrongARM technology to Marvell.

Related content from GigaOM Pro (sub req’d):

As Devices Converge, Chip Vendors Girding for a Fight

For Phones, the Future Is Multiple Cores

  1. No popular mobile OS currently runs on x86 architecture and I don’t foresee MeeGo leap-frogging past iPhone, BlackBerry, et al.
    Building effective hardware for a smartphone is great, but if there isn’t an OS that’s popular with devs and consumers, it won’t have a chance. Put another way: the benefit of x86 compatibility is lost on smartphones.

    That means the Android port to x86 allegedly in progress is Intel’s best shot to get into smartphones. I think the only company that can save Intel in this space is Google as a result.

    Share
    1. Hamranhansenhansen Wednesday, May 5, 2010

      No popular mobile OS currently runs on x86 architecture

      OS X does, the core operating system under iPhone OS. And iPhone OS apps are all developed on Intel and compiled for Intel to run in the desktop iPhone and iPad simulators.

      If Intel gave Apple a reason to use Intel chips in iPad, iPhone, and iPod, then Apple could do it in less than a year, just as they jumped from PowerPC to Intel in less than a year.

      But can Intel give them a reason?

      Share
      1. would that be one more reason for apple to disallow adobe’s cs flash exporter on the iphone? if they ever switched from arm, they would have to wait for adobe to get around to updating it. and wait. and wait.

        Share
      2. Apple has already made up it’s mind and going full steam ahead with ARM by buying P.A.Semi and Intrisity. Apple wants complete control of its roadmap, design chips specially for its own products and being able to differentiate from competition. The competition is buying of the rack parts while Apple wants to custom design them.

        Share
      3. Good point on OS X as the core of iPhone OS. But taking your argument one step ahead, why would Apple move iPhone OS to x86 when they can design their own ARM chips and further control the hardware / software / user experience package?

        Share
      4. @kevin You are absolutely right. Apple realizes that mobile computing is the future. They also realize that being able to build their own cpu that is customized and optimized to work with iPhone OS gives them the advantage they need against the competition.

        The A4 processor has been an integral part of the iPad’s success. The competition can’t build a slate device that can match the iPad’s dimensions, weight, lightening fast processing and still achieve 10+ hours of battery life without a customized cpu optimized to work with their mobile os.

        Share
      5. tofino, that is exactly the reason. Sure there are other benefits from using xcode, apple will do all the heavy lifting is they need to do the switch, that way they are not as dependent on adobe or other large shops to get their butt’s in gear. Irony here is that the only ones really loosing here is adobe. if apple has to change for some reason then all those dev’s have to wait for adobe to rebuild / test and optimize. least not wait for any of then enhancement apple brings out every now and then.. how come people not see the irony in all the ramblings of the adobe devs of this. reminds me of an old saying my mom use to say when i complained about things as a kid. “you know you are cutting your knows to spite your face right?”

        Share
  2. Excellent analysis, Om.
    One of my core strategies for success going forward is boiled down to:

    the smartphone is the computer!
    The PC is a dinosaur.

    This is why I have such a low opinion of Microsoft. They want to maintain their PC-gatekeeper status and maintain those fat Office packaged software margins. Given the cost structure facing Intel, however, and their level of competition as you’ve listed, it looks like they could be potentially even worse off.

    Share
  3. Great article. Intel is trying to shove a square peg into a round hole. . . and they keep trying this over and over figuring that if they throw enough money and resources at it they will win.

    ARM chips are making there way into servers which will bring a great deal of R&D into ARM chips pushing them further along at a faster pace, thus reaching speeds that most users will find perfectly acceptable across a wide range of produce, phones, notebooks, and even desktops. The one hurdle they have left is getting MS on board since they still hold the dominant OS in the world that works only on x86 architecture.

    However, GPUs are bridging the gap in every direction. That is a very interesting area especially when considering most users needs of high demand cpu usage comes at the expense of media. . .

    Personally I can’t wait for high performance tablets, notebooks & desktops that don’t need a fan and run the same OS :D

    Share
    1. Hamranhansenhansen Wednesday, May 5, 2010

      You don’t have to wait. Apple systems either don’t have a fan or the fan runs very rarely, and even then are tuned to be quiet, and they all run the same OS. Apple’s systems also have H.264 decoders in hardware, so video doesn’t run on the CPU or cause the fans to start.

      Share
      1. This is a wrong assumption !!! All apple notebooks including the Macbook Air/pro have a fan. And the Apple systems are one of the hottest (in terms of temperature) out there in the market. And if ARM is able to enter Notebooks and Servers, there is no way they can acheive that without bumping up the power.

        Share
      2. @Charles — Strict literalist answer: iFixit couldn’t find a fan in the iPad; waiting not required.

        @Hamranhansenhanser— New MacBook Pro here. In ~ 2 weeks, I still haven’t noticed the fan running. Been using it about 10 hrs/day in a private office, apartment with no TV and occasional flights (where I wouldn’t hear it).

        Nor does it get actually hot for me, in usage patterns that made its predecessor too hot for my lap. Warm, yes.

        @layman_user— go back to that hit job done by “PC Authority,” & you’ll see they compared it by (a) maxing out running a GPU-intensive test, (b) versus a laptop with a weak GPU (on which nobody would run Cinema4D) that burns 30 watts less power than the one in the MBP, then (c) using Windows to bypass the MacOS power management.

        I imagine the ARM advantage is not just the instruction set, rather, that Intel has put its engineering resources into pushing the envelope, where they can command top dollar, versus low-power management, irrelevant in a gamer’s box with a 300W power supply. Now, it’s easier to shrink the die and turn up the clock for throughput at same power levels, than to shed functionality while somehow keeping X86 compatibility and fine-tune for a market where you don’t currently have any volume.

        Too bad about that XScale choice. But hey, IBM is still making a fair amount of money on mainframes and consulting. Just lousy growth.

        Share
  4. Good analysis. PowerPC and Alpha were expensive compared to Intel during that time. Intel was not a big company back then. Intel can still comeback if they can buy Marvell which they sold their ARM based processors to.

    Share
    1. Marvell-buy would be intriguing but something tells me that it would be a whole new can of worms, especially in this era of overactive FTC.

      Share
    2. Intel’s XScale sale looks like total crap right now, doesnt it :)

      The reason they sold xscale (which btw was one of the best arm implementations of that day) was that:
      1) Margins were low
      2) CE guys did not want an expensive ARM. And their devices did not need the processing power to justify the cost intel wanted to charge
      3) Intel tried to innovate by adding instructions to arm which nobody wanted to adopt because well the ARM instruction set was brilliantly universal. Thus no differentiation. The XScale did find itself in a few Treos which were the cutting edge of that generation.

      Share
  5. pk de cville Wednesday, May 5, 2010

    Om,

    I’ve seen Intel’s predicament your way for some time now. And I have a question for you…

    Is there anything stopping Intel from licensing ARM architecture? I believe Intel could use its lead (12 to 24 months?) in fab tech and massive fab resources to deliver the fastest and most power efficient ARM based chips.

    Wouldn’t it eventually dominate the market under this strategy?

    When will we hear Intel’s intro of Intel fabbed ARM chips?

    Thanks,

    Share
    1. Nothing stopping them from licensing ARM except their own hubris and frankly even if they do, it would take them time to compete in the market place.

      I think it is interesting because in a competitive marketplace, Intel can’t compete. It has the same issues as Microsoft — I guess muscle memory from being a monopoly does that to you.

      Share
      1. @Om,

        You’re overlooking a very critical area in your response to pk de cville, that is Qualcomm’s patent portfolio which principally covers cpu’s, soc’s, and radios for the ARM architecture. I do believe that this same patent portfolio accounts for the majority of Qualcomm’s revenues. That said, Intel can certainly license ARM technology, but all that does is enable Intel to feed $$$ to their new “frienemy”.

        My $.02,

        Best.

        Share
      2. Intel does NOT have the same issues as Microsoft on any scale. You sound off like the sheep that are being herded off the cliff.
        All ANTI-Microsoft, Anti-Intel. Regurgitating the same nonsense that people have been throwing up for the last twenty years. If you believe that Intel can’t compete on any scale now or in the future you truly are biased and shouldn’t even have a forum to spew your garbage.

        Share
  6. Om – this is an intriguing read, but has some flawed logic. Virtually no other industry grew in 2009 – many shrunk significantly. PCs bucked that trend and grew, and are projected to grow this year – led by mobile laptops – by 20%. Most envy that kind of growth, and the ‘death of the PC’ has been proclaimed hundreds of times the last 2+ decades. Seems to me everything is becoming more PC-like. Are people using i-phones as cell phones or more like mini-computers? Also, Intel has ambitions in multiple adjacent-PC areas, not just phones: 100M+ netbooks to date; TVs, cars, tablets, even fishing and golf cart companies are calling us. Sure, many of these areas are still a WIP, and yes, you can argue we’re behind. But on yesterday’s Atom news, we went out of our way to emphasize an historic and eye-opening drop in power – up to 50X – something most said was impossible. I don’t think we did a bunch of handwaving about winning or why INTC should skyrocket. (Disclosure – I work for Intel, and doth protest too much).

    Share
    1. Bill

      At no point in my piece am I making a case that PC is dead and INtel looses domination over the PC ecosystem. I can debate that PC-like and computing everywhere are two distinct phenomenon, but let’s leave it for another day.

      The point I am making:

      1. Intel isn’t going anywhere in fast growing new markets.
      2. Growth investors bet on the future.
      3. Hence Intel stock is stagnating.

      Beyond that, my contention is that the way Intel is structured, the company isn’t capable of living with thinner margins that come with a competitive marketplace. That is one of the reasons why it hasn’t quite succeeded in its expansion into newer markets.

      Now to your remark about “power saving.” I don’t take anything away from you guys, except that the ARM ecosystem is still miles ahead of your employer.

      Share
      1. Looking to the past year, Intel’s stock has almost doubled. Looking at it that way, the market has spoken and seems to disagree with you. Also, many would say Google is a growth stock, and yet it is trading 30% below the all time high it hit in 2007. Is the market saying that growth investors shouldn’t bet on Google?

        With much respect, my point is:

        1. Intel isn’t really a “growth” stock and hasn’t been for some time. It’s in the Dow 30 – not exactly a growth stock hub.
        2. Computers larger than smartphones (netbooks, laptops, tablets, servers, etc…) will still be sold in massive quantities (40 million+ netbooks this year in the U.S. alone – Intel powered) for at least a few more years, if not decades.
        3. Intel will be fine and at some point will have a decent share of the smartphone chip market, which will augment the dominance they have in the netbook and laptop market.
        Share
      2. Good read Om, but it seems you’re using a conclusion as your first point. There are two real observations you can make (with different confidences):

        1. Intel stock is (relative to growth markets) stagnant; this is an objective observation as much as it can be, but is still a bit of an apples/oranges comparison.
        2. Growth investors bet on the future; while this is true, you seem to be inferring that investors are always correct.

        Based on those two observations, you can conclude that maybe Intel isn’t going anywhere in growth markets. There are obviously other factors–comparing growth between Intel and ARM doesn’t really work since Intel’s portfolio is much larger than ARM’s and subject to many different market volatilities.

        The argument’s not definitive, but you’re right in pointing it out, since it’s certainly a potential (maybe probable) outcome for Intel.

        Share
    2. @Bill Kircos says, “an … eye-opening drop in power – up to 50X…”

      As a non-engineer (mostly, a mathematician), I’m in the dark about how you could use fifty times less power. Fifty times what?

      Do you mean 98% less? (I.e., that in nap mode the predecessor processor uses 50 times more than the latest?)

      Could you throw out real data— a number dropping by 50 times to another number?

      “Inquiring Minds Want to Know!” ®

      Share
      1. If I interpret correctly, 50X is the power reduction by using power switches in their chip. If Intel left their chip powered-on all the time it would consume 50-times more power (in idle mode) compared to using power switches that can be turned off (in idle mode). This does not mean that battery-life will improve by 50X because battery life is still dominated by active power consumption (video play back/record, web browsing, emails, WiFi etc.). The 50X number is a “marketing” strategy — it does not mean anything from a battery life point of view. The overall improvement in battery life is going to be a tiny single digit percentage!

        Share
  7. The smartphone/mobile phone market doesn’t want to be commoditized as happened in the PC market with Intel and Microsoft aggregating all the value, reporting 60% plus profit margins, while the PC makers and everyone else had to make do with single digit profit margins.

    Also, Intel has won the war in that it has 80% of global microprocessor markets. Even if it did well in smartphones and tablets, it wouldn’t mean a whole lot of new revenue.

    Intel’s future growth is tied to global economic growth rather than fairly niche markets. That’s why the stock market yawns when Intel makes these type of announcements.

    Share
    1. Tom

      The future of technology is tied into the mobile cycle and not as much as the PC cycle, The global economic growth is more evenly represented in the mobile cycle and that is where all the future is.

      Share
  8. Good article, although I think you underestimate how good Moorestown is. And the fact that Intel actually still has headroom with Atom in both power and performance. Probably a fair bit more than ARM does, and no one, not TI, Samsung, AMD, NVidia, has shrink process technology that Intel has.

    And given that Android and WP7 are both easy to move to x86 (the WP7 emulator is the actual WP7 OS running on x86), if Intel can show on real designs that Moorestown has the numbers they showed yesterday then I think we’ll start to see Android and WP7 devices on it (although I know Intel apparently isn’t happy with how MS architected WP7).

    I also wouldn’t count MS out either. They’re being pretty smart not cannibalizing Windows, but I think they’re getting closer to realizing that they’ll need to (although no use losing $10B in profit any earlier than one needs to).

    Share
    1. AMD spin-off Global Foundries is making 28nm ARM Cortex A9 dual-core designs to be shipped within months: http://www.brightsideofnews.com/news/2010/4/6/globalfoundries-to-bring-fastest-28nm-arm-a9-design.aspx

      Most of the ARM designs are available on 45nm process already.

      Share
      1. pk de cville Thursday, May 6, 2010

        If the link is credible, I wouldn’t be surprised if someone bought them.

        Share
      2. Ken Jackson Thursday, May 6, 2010

        Global is good, but I think virtually everyone considers their foundries as less refined than Intels. One of Intels strengths is moving more on-chip with good shrink and yield. Moorestown is a perfect example of the strategy.

        And based on what I’ve seen they have a fair bit more they can do… which is pretty exciting for everyone I think.

        ARM vs x86 is a lot more fun than the old x86 vs x86 world.

        Share
  9. Om,

    While Intel has certainly lagged in round 1, I think round 2 in 2011 will make things interesting. Here’s an interesting writeup by Anandtech: http://www.anandtech.com/show/3696/intel-unveils-moorestown-and-the-atom-z600-series-the-fastest-smartphone-processor/1

    Power numbers sound competetive, and performance is great. I’d say Intel doesn’t need to do better. As long as performance/power is competetive, Intel’s process technology lead will enable it to push those lower price points, and squeeze out the higher cost providers. I won’t be surprised to see a pricing battle sometime in 2011-12, like we saw between Intel-AMD a few years back. Too many players in the mobile chips market right now..

    And why should Intel be a growth stock? Given the 3% dividend yield and a forward P/E of early teens, I would call it an attractive value stock proposition.

    Share
    1. Sajal

      I think there are two key questions for Intel:

      1. However great that platform (Moorestown) be, it is still not as good as some of the others and lacks the important integration with mobile radio technologies.
      2. Where are its partners for this product? Most of the major handset makers (volume players) are all tied to other chip makers.

      I made some of my other arguments above so I won’t repeat myself.

      That said, here is a question for you regarding growth vs value stock. It is trading at 11 times 2010 earnings. Does that sound like a value stock? Love to get your thoughts here.

      Share
      1. Ken Jackson Thursday, May 6, 2010

        There’s a difference between stock performance and market performance.

        That is Intel could end up dominating this new mobile space, but the stock price still trend down if the mobile space doesn’t have the margins that the desktop space had. And this is almost certainly true.

        So if investors believe, “Wow Intel may actually take over this mobile space”, but they believe they’ll do it at the cost of the higher margin, near equal volume desktop space, they still may value the stock lower.

        This says nothing about the technology of the company.

        For Apple things are fundamentally different. They’re moving from a space where they’re a niche player to one where they may dominate. This justifies growth in the stock. But if it was MS who did the iPhone and had sales equal of Apple, I think their stock would still be flat. It’s a market that will likely cannibalize their current dominant market. The only way that MS or Intel become growth again is to find a new HUGE area that doesn’t cannibalize their existing one. For example, imagine home robotics, or something like that.

        Share
  10. OM,

    I am continually fascinated by polymorphic nature of technology companies: today’s goat was yesterday’s prize bull.

    Intel may have trouble penetrating the mobile market for the next 18 months, but its entrance seems like a foregone conclusion. The give and take between Intel, Qualcomm, Apple, TI, et al will make winners of us all in the end as both consumers and members of the species. The drive toward smaller and more mobile is changing the way we use technology and how we integrate it into our lives. It will also reduce the immediate financial cost of our habits as well as the long-term environmental cost.

    Today’s futurists try to understand how current trends will produce tomorrow’s, and historians will look back and try to figure out why we made the choices that led us there. I am an enthusiast: I am loving the ride!

    Share
    1. David

      I agree with your assessment regarding goat vs prize ram. I would say, having observed two shifts in my life (PC and Internet), I can say new computing paradigms bring new leaders.

      Mobile is a whole new ball of wax and it would bring its own set of winners and losers. You can see signs of who will be what in months/years to come.

      Share

Comments have been disabled for this post