To many long-time tech followers the story of Intel Corporation (NASDAQ:INTC) losing control of the mobile market to ARM Holdings plc (ADR) (NASDAQ:ARMH) of the UK makes no sense.
I’m sorry. But Intel’s problems are much deeper than those people think.
Intel’s Real Problem
I owned Intel Corporation (NASDAQ:INTC) stock for about 15 years. I have followed it as a reporter for 30 years. While it’s certainly possible Intel could gain share on ARM in the future, those who predict it so confidently don’t know what they are talking about.
ARM Holdings plc (ADR) (NASDAQ:ARMH) is not Advanced Micro Devices, Inc. (NYSE:AMD). It’s not Texas Instruments Incorporated (NASDAQ:TXN). It’s not even International Business Machines Corp. (NYSE:IBM), which made the PowerPC chip. It’s not a chip maker at all. It’s a design house. It’s in the business of licensing its designs to anyone who wants microprocessors, and its the leader in low-power designs.
Compared with Intel, ARM Holdings plc (ADR) (NASDAQ:ARMH) is a gnat on an elephant. It may do $500 million in business during a calendar year. Intel does more than 100 times more, over $50 billion.
The difference is that Intel Corporation (NASDAQ:INTC) does not just design chips. It makes chips, and it has a huge bureaucracy dedicated to selling chips. The chips it sells are Intel chips, and they’re compatible with other Intel chips. The company is scaled to the needs of Moore’s Second Law, which holds that as chips grow in complexity they cost more to produce.
The problem here is that companies like Apple Inc. (NASDAQ:AAPL) don’t care about compatibility. They care about control. By licensing an ARM design, by tweaking it through their own people, and by ordering its production in quantity through, say, a Samsung chip foundry, Apple maintains absolute control over its hardware.
Chinese OEMs don’t care about compatibility either. They want orders. They don’t want to design, they want to produce. They don’t want to buy chips, they want to sell production. Intel Corporation (NASDAQ:INTC) has failed for over a decade to understand this, and that’s why it lost the mobile game, not just to ARM Holdings plc (ADR) (NASDAQ:ARMH) but to companies like QUALCOMM, Inc. (NASDAQ:QCOM) and Broadcom Corporation (NASDAQ:BRCM), which accommodate this need.
Note, too, that Qualcomm and Broadcom don’t make chips, either. They order chips from foundries when they make sales. They don’t have Intel’s capital expenses. They are what are called “fab-less” chip companies, and the future of the chip business is fab-less.
Break Up Intel or Sell It
What I’ve suggested is that Intel break itself into two parts, a design house and a chip foundry. The design house would tweak Intel designs to the tastes of product vendors, with the vendors holding the additional intellectual property, and the chip foundry would make chips for anyone who asked, meaning they could even make ARM designs.
But this isn’t going to happen. It would go against everything in Intel’s corporate DNA. And Intel remains, despite a decade of stagnation, a huge company, 100 times bigger than ARM Holdings plc (ADR) (NASDAQ:ARMH) even now.
So last year, after standing on the sidelines and writing about this for too long, I finally took my own advice. I bought some ARM Holdings and sold out my Intel.
According to my bookie, whom for purposes of this piece we’ll call Charlie, the 100 shares of ARM Holdings I bought in late September are up about $1,300, over 40%. Since late September, Intel is down about $2 per share, so 100 shares of Intel would have lost $200.
Now maybe Hibben is right. Finally. Maybe Intel Corporation (NASDAQ:INTC) is about to squeeze out ARM chips the way it squeezed out IBM’s PowerPC a decade ago. Maybe the Wintel dynasty still has legs.
But I want to see proof before I trust Intel again.
The article Why Intel Can’t Get Its Arms Around ARM originally appeared on Fool.com and is written by Dana Blankenhorn.
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