When Apple (NASDAQ:AAPL) introduces their new version of the iPhone 6 in the weeks ahead, I expect them to take an extraordinary amount of time to position its 20nm A8 processor as significantly better than Intel's (NASDAQ:INTC) 14nm Broadwell across the full range of its mobile product line. This may seem counterintuitive that Apple could get away with this, however process technology alone does not determine the winner in the mobile horse race. In fact Intel has had to dramatically re-tool their Tick-Tock Model in order to get more competitive in mobile PCs and to improve its finances. Apple's marketing and branding will hopefully have the effect of bringing Intel low in order to get future access to the leading edge process technology at much lower costs. Going forward Intel should consider ramping its new process technologies with Apple's mobile processors at the same time it ramps its newest mobile chips.
Until Brian Krzanich took the CEO reigns at Intel, the company would build its larger desktop and notebook processors first and then follow a year later with an Ultra Low Voltage (ULV) version for the smaller mobile PCs. The additional year allowed the process to mature and reach high yields. The success of the MAC Air has caused Intel to design processors that can meet the requirements of very thin mobile PCs that are also lower in cost. The 14nm Broadwell chip is the first CPU to meet the <5W TDP requirement and is also much smaller in die size than the 22nm Ivy Bridge. Logically it made sense to ramp Broadwell for ultrabooks first in order to meet market demand and to allow 14nm to achieve higher yields. Krzanich balanced this by extending the life of the 22nm factories and the result was a significant increase in margins as average costs dropped dramatically.
The failure of the Atom processor to gain ground in smartphones and to profitably secure a tablet toehold is still weighing on Intel. They can't continue to be a two product company with resources divided between the mobile Atom and the Broadwell/Skylake processor line. The $11B a year capex has to align with volume ramps, otherwise it is wasted. An all the wood behind the arrow of Broadwell/Skylake simplifies the capex strategy and would allow moving R&D resources away from Atom so that Intel could achieve a higher ROI as Broadwell drives into Atom price points that start <$30 and thereby make the MAC Air, Microsoft (NASDAQ:MSFT) Surface and other PC tablets more competitive vis-a-vis the iPad.
Apple knows Intel is getting more aggressive on 14nm Broadwell with the intention of squeezing the iPad but the company has other plans that are more long reaching and intended to ultimately outflank Intel. Yes Mac Air with x86 is important but interoperability between iOS and OS X is more so and it will be interesting to see how it rolls out. In reality, Intel is in the uncomfortable position of waiting to see how Apple's A8 will be positioned at its launch. It is a reactive moment not proactive as has been its history.
The A8 will be a highly integrated SOC and positioned as the premier 64 bit mobile processor in the industry. Because the coverage will be very broad and deep it will reach both Apple and Android fans. Many will come to agree that it is impressive. These marketing events are the things that strengthen and solidify great brands. The A8 is a co-brand backing the iPhone 6 and no doubt Apple will say the latter was not possible without the former. How can Intel counter the message since they don't even sell mobile devices.
With the Apple iPhone 6, the market and analysts will finally get to see how well the tablet market holds up to the more capable, larger phones that are in many cases subsidized. My bet is that the iPad mini takes a hit.
For Intel, it has to be frustrating to see that the mobile initiative started very late by former CEO Paul Otellini, will be thwarted because their process lead was not able to overcome Apple's Ecosystem. In addition, Apple has had years to build up its microprocessor design expertise leaning on a quick turnaround model that pumps out processors on a faster than Tick-Tock basis.
Where does this leave Intel? It appears that Krzanich has made some very strong strategic moves to restart the company and to focus on making it much leaner. The redefinition of Tick-Tock to meaning smaller mobile chip (i.e. Broadwell) first followed by big die (i.e Skylake) for desktop and notebook later has solved the issue of a slow ramping, low yielding 14nm process. Extending 22nm was also a stroke of genius as the AMD (NYSE:AMD) competition fades away in PCs and servers. If Apple dominates with A8 based iPhones and iPads then he will need to open up the foundry to the multi-billion unit market at a profitability that was never possible with Atom.
Many analysts today do not foresee a move by Apple into Intel's fabs. For certain there are cultural issues and the impending loss of face in the demise of the Atom processor line. Paul Otellini's strength was being able to rebuild Intel's server business after falling behind AMD and turning it into a growth engine.
The PC and mobile markets are now a foundry game and the company has to decide whether to step in with both feet or be exposed to competition from Samsung (OTC:SSNLF) and TSMC (NYSE:TSM). The returns from being an Apple foundry are much higher than most believe as the former will seek to stretch its mobile processor lead. It's the same model Intel perfected in the 1990s.
Disclosure: The author is long AAPL, QQQ, QLD, TQQQ.
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