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I remember having a discussion with the folks over at the Intel (NASDAQ:INTC) boards at iHub in which a number of members argued that the merchant vendor strategy of selling chips to partners was not the right way to go in this market. I actually initially opposed this thought, as it seemed that Intel would be taking an inordinate amount of risk by competing with its customers, but the more I thought about it, the more it made absolute sense. I believe that Intel should leverage its brand and its technology to become a fully-fledged smartphone vendor à la Samsung (OTC:SSNLF).

Killing Two Birds With One Stone

The big argument against Intel's strategy in the phone business is that the majority of the smartphone market is essentially held captive by Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF). The problem with the merchant chip vendor strategy is that Intel faces quite a lot of competition here from many vendors, thanks to the ubiquity of an ARM (NASDAQ:ARMH) processor/graphics license. Qualcomm (NASDAQ:QCOM) seems to be the one to beat on the merchant vendor side in the US thanks to its best-in-class modem technology, so for Intel's strategy to work it needs to kick Qualcomm out of a number of key designs - a doable, but very tough proposition.

So, instead of trying to just be a chip vendor, why not leverage the Intel brand to sell phones? Samsung pulled it off, so I see no reason for Intel not to be able to. Unlike in the PC space where Intel's entire business is selling chips through OEMs, Intel has virtually zero smartphone market share. There is very little to lose here, and nearly everything to gain by truly building Intel up as a well-loved consumer brand known for designing phones that are best-in-class from the lowest end to the highest end.

Intel Has Many Of The Pieces Already And Lots Of Growth To Be Had

Intel has its own chip manufacturing plants, its own software team, its own modem, and its own applications processor. Heck, at this point, Intel should just buy Micron (NASDAQ:MU) to get into the DRAM/NAND flash businesses (well, Intel already is in flash via a JV with Micron...) so that it controlled more of the BOM for all computing segments from notebooks to servers to smartphones. In fact, Intel spends a great deal of R&D keeping Android optimized and tweaked for Intel chips, and even produces its own smartphone reference designs that many vendors simply rebrand and sell. There is no reason to deal with partners like ASUS, Acer and Lenovo (OTCPK:LNVGY), all of whom will probably not use Intel chips in the majority of their designs anytime soon, when Intel could sell the whole darn device itself.

Selling a $20-$40 worth of content into a smartphone isn't going to get Intel where it needs to be, but selling $100 - $600 worth of a whole smartphone, even at a lower gross margin profile, would do wonders for both the top and bottom lines.

Conclusion

In these new computing markets, vertical integration is becoming more and more critical. If Intel is to realize its full potential as possibly the world's most profitable computing/electronics company, then I believe that with its semiconductor technology prowess, coupled with one of the world's most well known brands, building its own phones could be the way to really grow the top and bottom lines dramatically in a way very similar to Samsung has.

Source: Should Intel Sell Its Own Phones?

Additional disclosure: I am short ARMH