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According to a recent report from Bloomberg, the king of search Google (NASDAQ:GOOG) is mulling its entry in the server processor market by designing its own chips. The report caused the shares of Intel (NASDAQ:INTC) to fall around 3%.

Reason behind Intel's fall:

Google provides services like Search, Google Now, Google+, etc. These services require the best servers integrated with the best processors. Intel Corporation designs and manufactures some of the world's best microprocessors and is one of the largest suppliers of high-performance server processors. The prime reason behind the fall in the share price is the fact that Google is among the biggest customer of Intel's server processors. As per Bloomberg supply chain analysis, Google is among Intel's largest customers. If Google starts to design its own processors, then Intel will not only lose a big customer but also will have a new competitor in a market that delivers excellent returns (see the chart below) and currently is dominated by Intel.

(click to enlarge) (source: The company's document)

Google's reaction:

Google showed no reaction.

As said by Liz Markman, a spokeswoman for Google:

"We are actively engaged in designing the world's best infrastructure," "This includes both hardware design (at all levels) and software design." Markman declined to say whether the company may develop its own chips."

Effect on Intel:

I am of the view that even if Google actually moves ahead with the reported initiative, the effect on Intel will be minimal in the foreseeable future due to reasons like:

  1. Google's experience in the hardware side of business till now.
  2. Google's data center architecture so far.
  3. Experience.
  4. Needs to be the best.
  5. Not a core business.
  6. More important things to do.
  • Google's experience in the hardware side of business till now:

Google may well be the global leader in the software technology in many sectors such as search, mobile operating system, and online entertainment, but it has a very limited presence in hardware technologies. From Motorola to Nexus, the company has been designing the devices that do not need much hardware expertise. Moreover, in spite the fact that the company is using the hardware products from some of the best companies in the world for the devices that the company has designed till now, the devices are just okay, nothing extraordinary.

  • Google's data-center architecture so far:

Google owns a global network of data-centers scattered all around the world. Each of these data-centers holds numerous servers. These servers are the basic hardware for Google. These servers store and compute enormous amount of data (big-data). Though Google claims that it designs its own infrastructure, its hardware designing is limited to the extent of choosing right hardware products from world's leading vendors.

  • Technological experience:

Google has no or negligible experience in the chip designing till date. It is highly unlikely that Google in the near future will be able to design processors that can match the processors of the companies like Intel, which is decades ahead of Google in the chip designing technology.

  • Needs to be the best:

The quality of almost all the services that Google offers (like search, cloud, online entertainment) to much extent depends on the servers and their processing speeds. The company can't compromise the quality of its services as this can hurt the business and the brand image of the company. For example, presently any search performed on Google Search takes about a second to display results. This kind of speed is primarily due to the quality of the server processors that the company uses. Anything that increases the computing time or reduce the processing speed will reduce the quality of its Search services.

If the company actually wants to design and use its processors for its own servers, then it needs to design the best processors in the world. And it's very tough task for a company that has a negligible experience in cutting-edge hardware technologies.

  • Not a core business:

Hardware designing is not the core business of Google and any presence that the company has been establishing in the hardware side of the business is to support its existing business (the software products or services) of the company. Entry in the chip designing will not serve any major purpose as far as existing business of the company is concerned.

  • More important things to do:

Google is quite busy with its efforts towards the monetization of its offerings/services like Android, YouTube, etc. where the company has created a significant scale and lead in terms of market share but yet to earn any significant revenues from some of these services. So, even if Google enters the industry, it is highly unlikely that chip designing will get the required focus as Google's existing businesses will be its priority.

Conclusion:

Google may well be considering to enter in the chip-designing (microprocessors) industry but that does not mean that the company will meet an instant success, or the company will be able to pose a threat to the companies that hold decades long experience, expertise and unmatched IP portfolio on their side. As far as Intel's business related to Google is concerned, Intel will only lose the business if Google is able to design the chips that are better than Intel's products. Google's prime priority is its existing businesses and it will not compromise the quality of its infrastructure related to its existing services/businesses.

So, the entry of Google in the chip designing industry can hurt Intel's business only if Google develops a better product, or Google decides to compromise the quality of its computing infrastructure, which is highly unlikely as it plays a major role in Google's success.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must read offer prospectus and consult its financial adviser before making any decision.

Source: Intel: Google Is Not A Threat