Intel Corporation (NASDAQ:INTC) is also one of the few semiconductor companies that manufacture products using their own facilities (most semiconductor businesses design their chips and outsource manufacturing to save costs and generate more predictable cash flow).
As a result of its scale and vertical integration, Intel exerts more control over its performance optimization and can introduce new products to the market at a faster pace.
With costs to build leading-edge manufacturing facilities rising (it becomes increasingly difficult to build smaller chips), fewer companies are able to compete with Intel’s advancements in performance, energy efficiency, and cost.
In addition to spending on manufacturing plants and R&D, competitors and new entrants must contend with the strong reputation of Intel’s brand, which recently ranked as the world’s 14th most valuable brand.
Altogether, Intel’s economies of scale, leading technology portfolio, and cutting-edge manufacturing processes have created a powerful ecosystem with high switching costs for customers.
Intel’s architecture has been refined for decades, and the company has funneled well over $100 billion dollars to continue improving it.
As the incumbent technology in PCs and data centers, Intel’s processors have effectively locked up customers. For example, when Dell Inc. (NASDAQ:DELL) develops a new computer, there is no compelling incentive to switch to a different processor family as long as the previous version worked and the next one offered by Intel is even better. Many legacy applications run on Intel’s technology, and switching would be costly.
Inertia is a powerful factor in these markets, making it even more difficult for a real challenger to Intel to emerge.
As the industry’s giant and only viable supplier in many cases, Intel largely controls the pricing of its chips and can exert pressure on Advanced Micro Devices, Inc. (NASDAQ:AMD), its only competitor in PC microprocessors. As seen below, Intel’s market share has risen significantly over the last 10 years at the expense of AMD.
Source: CPU Benchmark
With less scale than Intel and a weaker technology portfolio, there is little Advanced Micro Devices, Inc. (NASDAQ:AMD) can do to compete. In response to Intel’s pressure, AMD actually spun off its manufacturing business in 2009 in an effort to improve profitability.
Today, Advanced Micro Devices, Inc. (NASDAQ:AMD) is more focused on non-PC markets in pursuit of new areas for growth where Intel isn’t as dominant of a force.
Intel’s leading PC technologies have also provided the foundation for the company’s expansion into the data center and “Internet of Things” markets.
Intel’s PC business provides incredible scale with about $35 billion of revenue and possesses substantial intellectual property that translates over into other electronics such as servers. This gives Intel an advantage once again over smaller players with inferior manufacturing processes.
However, it doesn’t guarantee Intel’s success in dominating these markets either. One move Intel recently made to continue strengthening its position in data centers and Internet of Things devices was its acquisition of Altera for $16.7 billion in 2015.
This deal helped Intel gain exposure to field-programmable gate arrays (FGPAs), a more flexible type of semiconductor chip that could account for as much as a third of the processors in all data centers by 2020.
By purchasing Altera Corporation (NASDAQ:ALTR), Intel can stay in front of this potential development and deliver customizable, integrated products.
Overall, Intel’s scale, world-class manufacturing processes, long-standing customer relationships, massive intellectual property portfolio, early-mover advantage (in PCs), and strong reputation for quality have helped it essentially monopolize the market for PC processors.
The company is using its advantages in the PC market to successfully extend into data center processors, which it also dominates, and is trying to crack into mobile phones and Internet of Things devices to continue its long-term growth. Intel is certainly a force to be reckoned with!
