Seeking Alpha
Long-term horizon, tech, growth, homebuilders
Profile| Send Message| ()  

Intel (INTC) is well known as the giant of semiconductor manufacturers. Founded in 1968, their ever speedier Central Processing Units fueled the personal computer revolution. From the 1980s to 2007 they were king.

Then, in 2007, Apple (AAPL) released the iPhone and the mobile revolution began in earnest as your pocket device became a portable computer. The new smartphones (Apple's and others') swept onto the field, followed by tablets. The problem for Intel is that, while all of these have processors, they did not use Intel processors.

Intel has suffered from missing this mobile revolution. It recovered from the great recession of 2007, hit a peak mid-2012, and has since dropped to languish in the $20 to $25 range. Part of this is driven by the fact that tablets sales have cut heavily into the sales of desktop and laptop PCs.

Since the mobile revolution, the overwhelming majority of the new mobile devices used processors based on the ARM architecture, a set of processor designs owned by ARM Holdings, PLC (ARMH).

(click to enlarge)

[Yahoo Finance]

ARM

Unlike Intel, ARM does not make processors. Instead it licenses its designs to others who go out and either make the processor or have them made at foundries. It owns a set of designs at different levels of complexity that implement its ARM instruction set architecture. They license both central processor cores and graphic processor units, although there are other companies that also supply GPU designs that can be used in building an ARM based SoC, or system on a chip. Customers who wish to build their own silicon designs from scratch may chose to license the instruction set only.

ARM based designs figure in products from small embedded systems such as military applications and cars, to smartphones and tablets, and even in some servers. [en.wikipedia.org/wiki/ARM_Holdings]

Apple

Apple does not make core decisions on emotional reasons. They do so for specific, clear (at least to themselves), rational analysis. In 2006. Apple moved from the PowerPC processors built by IBM and Motorola, to Intel's CPUs. They did it because, beginning with the G5, IBM could not deliver a high performance design with an acceptable heat level, particularly for use in laptops. Since then, all their Macintosh computer line has been built with Intel CPUs.

In 2006, however, the same shoe was on the other foot. Intel had no processors that could compete with the ARM designs in terms of computing power at a low power consumption rate. And, they had nothing that would compete with ARM systems for price.

The original iPhone had an off the shelf Samsung ARM CPU, but Apple soon went to developing their own SoC designs. This has culminated in the A7 found in the iPhone 5s, which surprised the tech world as the first 64-bit CPU in a smartphone.

(click to enlarge)

Of Atoms and Quarks

When the original iPhone was launched, it took the cell phone market by storm. With each successive launch, sales grew exponentially taking even Apple by surprise. The iPad as well, took off with greater than expected volumes. All this left Intel in the dust. Particularly as tablets began eating into PC sales. It took several years for the truth to become clear, but eventually Intel responded.

First they began producing their Atom line of SoC processors. The Z2760 was launched in Q3 of 2012 and features 2 cores and 4 threads, runs up to 1.8 GHz, and sells for $41. It has found its way into smartphones and tablets from many different manufactures, and overall has seen decent reviews.

At the Intel Developers Conference, the successor was announced, the Z3740 (sometimes called "Bay Trail"). It boasts a 64-bit processor with 4 cores, enhanced GPU, runs at up to 1.33 GHz, and costs just $32. This processor seems to be picking up some significant traction, particularly in the tablet arena. Dell (DELL) has picked it up for some of their new tablets. Benchmarks by AnandTech show some very good performance levels. Some tests (e.g. multithreaded integer) even have the new Atom approaching the performance of some desktop CPUs.

The big surprise however, is the brand new Quark SoC X1000, five times smaller than the Atom, and using only one tenth the power. The Quark processor core is a 32-bit, single core, single-thread, Intel Pentium instruction set compatible CPU operating at speeds up to 400MHz.

This processor (along with another Atom variant - the E3800 family) is aimed at the IoT.

"The Internet of Things consists of a wide range of Internet-connected devices, from a simple pedometer to a complex CT scanner," said Ton Steenman, vice president and general manager of Intel's Intelligent Systems Group. "The true value in the Internet of Things is realized when these intelligent devices communicate and share data with each other and the cloud, uncovering information and actionable insight that can transform business. As a leader in computing solutions from the device to the datacenter, Intel is focused on driving intelligence in new devices and gateways to help connect the billions of existing devices." [Intel press release]

One type of target field would be wearable devices. That is, products such as the long rumored Apple iWatch.

Back to Apple

While Gene Munster of Piper Jaffray says Apple could sell up to 10 million iWatches in 2014, the truth is that no one knows how they will sell. Analysts have always underestimated Apple iDevice sales. Obviously, a lot would depend on the price. More importantly, they would depend on how compelling the feature set is.

The point for this discussion, however, is whether or not Apple would build the iWatch using one of Intel's new chips - most likely the little Quark device.

This is a distinct possibility. I am not sure what other miniaturized SoC exists that could be used. But I really do not think that they will.

In the last few years, Apple has built up their iPhone and iPad lines partly on the fact that they have been able to build the best processors for the task. The original A4 for the iPad turned heads that Apple was making their own chips. Subsequently, each successive system has surprised techies with the cleverness of their design. Each one is configured to maximize efficiency for its specific purpose. The A5 astounded the geek world by including a much more powerful graphics processor than had been expected. Then they introduced the A5x for the third generation iPad, which kept the CPU core, but added an extra graphic processing unit to the earlier design to power the larger display. Similar clever, unexpected moves have been made in the A6 and now the A7.

What this tells me is that Apple likes to tweak its own processors, manipulating the design meet their very specific utilization needs, and this gives them a competitive edge. You do not get this fine tuning from an off the shelf part. They are too generalized and not so directly focused since they have to meet a wide variety of needs.

Thus, I will be surprised if Apple moves to anything but their own, custom processor, and it will be a little wonder.

Conclusion

Intel has wisely made a great investment in its move into the realm of smaller processors, particularly SoCs for the Internet of Things. They may be selling them at much lower prices (desktop CPUs are frequently in the hundreds of dollars), but the potential quantity is staggering.

While they may never move into Apple iDevices, there are plenty of other projects out there that will hunting for new products. Intel has repositioned itself for the future needs of the computing world. With time, it may grow once again.

=====

Related Article: Apple devices are more responsive than Android.

Source: iWatch And Intel Quark - Why Apple Will Win