While everybody has been fixated on the unfortunate early retirement of Intel (NASDAQ:INTC) CEO Paul Otellini and the dreadful earnings report from PC-giant Hewlett-Packard (NYSE:HPQ), the chip giant very quietly made an interesting acquisition. The firm picked up ZiiLabs - formerly 3D Labs - from Creative Technology in a $50M deal that was a mix of patent licensing as well as engineering team and asset sales.
So, why is this interesting/important?
The 3D Graphics Industry: Only Two Survived
Back when 3D graphics cards for the PC were a brand new technology, there were countless competitors, similar to the X86 CPU space back in the late 80s/early 90s and very similar to the ARM (NASDAQ:ARMH) system-on-chip industry today. Of course, industries do not remain profitable with many players, so consolidation happens. Nvidia (NASDAQ:NVDA) and ATI Technologies (now owned by AMD (NYSE:AMD)) ended up the last men standing in the PC graphics battle, while a few others - most notably Imagination Technologies - found profitable niches in other areas of the 3D world.
3D Labs was one of the players back in the day that focused primarily on workstation graphics. In 2006, the firm hung up its gloves in this arena and decided to focus on low power/embedded graphics and multimedia technologies. The firm went on to reinvent itself as ZiiLabs and has been very quietly developing ARM-based system-on-chips with its proprietary low power graphics technology intended for use in smartphones and tablets.
Intel Acquires The Firm To Bring Smartphone Graphics In-House
Intel then acquired the firm. While Intel has made significant strides with its integrated graphics technology in the notebook/ultrabook form factor (as well as the tablet form factor with the firm's upcoming "Bay Trail" platform), the firm still seems to be dependent on Imagination Technologies' PowerVR products for the smartphone space. While Intel actually owns 16.02% of Imagination, other competitors - most notably Apple (NASDAQ:AAPL) - also have access to the firm's technology, which may limit differentiation.
Owning ZiiLabs, which has been doing some interesting things in the space, certainly can't hurt. Graphics are very important in all areas of computing, from high end gaming PCs to low end smartphones, so leadership in this area will be critical for Intel's mobile strategy going forward.
This Doesn't Seem Like A Company That Is Giving Up...
While I am continually subjected to "doom and gloom" pieces about Intel's future in mobile (some are even suggesting that Intel hang up its design gloves and just become another foundry), it is clear that Intel is not so pessimistic. The firm has made a number of mobility-related acquisitions in the space that have proven to be quite useful. Here is a brief list and summary of what Intel has purchased so far for its mobile pursuit:
- Infineon's Wireless Division - This allowed Intel to enter into 3G and 4G: LTE wireless baseband market. Contrary to popular belief, Intel's problems in mobile do not stem from the applications processor side of things, but rather the connectivity. Until Intel releases a 4G LTE solution to pair with its Atom processors (expected by the end of 2012/very early 2013), there will be no Intel-based smartphones in the US (this is why Qualcomm (NASDAQ:QCOM) seems to own the whole space; it is the wireless connectivity heavyweight).
- InterDigital's (NASDAQ:IDCC) 3G/4G Patent Portfolio - As noted above, Qualcomm is the leader in connectivity patents. In fact, 80% of Qualcomm's operating income comes not from selling low-margin Snapdragon processors, but instead from collecting license revenue from its vast array of patents. Intel's acquisition of these patents was yet another move to help solidify Intel's position here going forward.
- Silicon Hive - Intel purchased Silicon Hive, which was a developer of mobile/embedded system-on-chip products. Technology from this acquisition has manifested itself in the latest "Medfield" Atom Z2460 smartphone chip.
And now ZiiLabs to help bolster the firm's low power graphics technology and portfolio.
Exciting times ahead for Intel shareholders, despite the continual media assault against the company. One thing is for sure: dying/stagnating companies do not make these sorts of "technological" acquisitions (i.e. not acquisitions to try to artificially inflate revenue, but meant to bolster technological prowess in an attempt to win a new market).
Disclosure: I am long INTC, NVDA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.