Intel (NASDAQ:INTC) was once known as the company that supplied the central processing units to just about every computer-oriented consumer facing device in the market. This was largely due to the fact that the majority of these computing devices sported Microsoft's (NASDAQ:MSFT) Windows on which the vast majority of applications were compiled for Intel's X86 instruction set architecture, and as far as X86 chip vendors went, Intel spent years beating most of them out of the market, leaving only AMD (which is currently not particularly competitive).
ARM and Android ruined Intel's party
Since Intel was horribly late to the mobile party, the world had moved on without Intel or its instruction set. A company called ARM Holdings (NASDAQ:ARMH) - which makes its bones by licensing its instruction set architecture (for others to build chips based on) as well as processor IP - completely fudged up Intel's monopoly by enabling many strong companies to finally get in on the processor business.
Now, while many can point to the likes of Qualcomm (NASDAQ:QCOM) or NVIDIA (NASDAQ:NVDA) as examples of merchant chip vendors that compete with Intel, they aren't the real problem - Intel has successfully competed with merchant chip vendors in the past and beaten them with sheer scale and, eventually, technology. The big problem here is that ARM's model took the power out of the hands of the merchant chip vendors and put it into the hands of the device makers.
Samsung and Apple hold half of the mobile market captive
Over the last few years, Samsung (OTC:SSNLF) and Apple (NASDAQ:AAPL) have emerged as the two major players in the mobile device market. While Apple's unit volume share in both tablets and smartphones is eroding as it focuses exclusively on the high end, its chip development prowess has grown to the point where it is unlikely that Apple would ever come to Intel for anything but foundry services vis-à-vis mobile.
The bigger problem, though, is Samsung. While Apple fights to hold onto its high end niches in both the phone and tablet space, Samsung is unashamedly attacking just about every single segment - from the very highest end to the cheapest smartphones. It is doing so in such sheer scale and has built its brand so well that it's tough to imagine that Samsung becomes less important as a potential customer as time goes by.
Samsung is aggressively pursuing its own chips
Samsung is very aggressively pursuing the development and manufacture of its own chips. While its processor line, dubbed Exynos, hasn't exactly been a world-beater, it has been a very competent line of chips marrying stock ARM IP and either ARM or Imagination's GPU IP. To be quite frank, Samsung's system-on-chip teams are still much better at designing mobile chips than Intel has been - in no small part due to the fact that Samsung understands its own requirements better than anybody else does.
Further, with Samsung's announcement that it plans to build its own custom CPU cores, it will be able to custom-tailor a processor to its own unique needs from a performance/power/cost perspective. This will make it exceptionally difficult for both Qualcomm (which currently supplies Snapdragon processors to a number of Samsung devices) to maintain its position as well as for Intel to try to "break in" to Samsung's higher end, flagship designs. With so much of that market held captive, and likely a higher proportion of the higher end market held captive than the general smartphone market share numbers suggest, this is a real problem for Intel.
What is Intel to do?
Intel needs to move very quickly - there's very little time to lose at this point. Intel has no choice but to build the most desirable applications processors for smartphones from the lowest of the low end to the highest of the high end. The problem is that it also needs to do so at a cost structure that enables the company to make money. Remember - Samsung can spend extra die area to make its chips "perfect" given the very high margins it sees on the actual device sales.
This is why Intel bulls should be very concerned about Intel's ability to execute in the mobile chip space. The longer it continues to push out uncompetitive parts (which are often competitive parts that just got delayed too long), the stronger that Samsung's in-house chip teams will become, further dimming Intel's prospects of ever really winning sockets that matter at the South Korean giant.
During 2014, Intel is unlikely to have a product for phones (outside of, perhaps, a cellular baseband) that Samsung wants. That honor - should Intel execute - should fall upon Intel's next generation chip known as "Broxton". If that chip fails to deliver, then it'll be time to give up on Intel's mobile strategy.
Disclosure: I am long INTC, IGNMF, 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.