Arm Holdings (ARMH) has dominated the mobile phone space without competitors since the dawn of the smartphone. That’s why its chart looks like Mount Everest. But soon a new processor from Intel (INTC), the Medfield, may disrupt ARM’s ascent. Medfield could be the first chip from Intel that is competitive in the low-power envelope that phones and tablets operate in, and the Medfield’s launch is predicted for the first half of 2012.
This is not a battle between chipmakers but competing instruction set architectures (ISAs): ARM and Intel’s x86. Intel is the gorilla in the desktop and server space. But right now the ARM ISA controls the mobile phone market. Chipmakers are numerous: Texas Instruments (TXN) has the OMAPs, Samsung the Hummingbird, Qualcomm (QCOM) the Snapdragon, Nvidia (NVDA) the Tegra, and Apple (AAPL) the A4, A5, etc. But all of these different chips operate using the ARM instruction set.
The ARM ISA became the only player in town because it offered much lower power consumption and better performance than competing offers from Intel’s Atom line of processors. This is doubtless why investor interest has created such a high PE (72) for ARMH. But Arm’s future success in the smartphone market is less certain now that Intel aims to compete. Will Intel use Medfield to bring x86’s desktop dominance into the mobile phone marketplace?
Currently there are no x86 mobile phones. However, the most popular smartphone OS, Google’s Android (GOOG), runs its apps inside of a Java Virtual Machine. So contrary to what some investment sites have claimed, Android’s apps will not have to be rewritten to be compatible with x86. Work is underway to get Android running on x86 but the apps themselves are hardware-agnostic, which could make Android a great entry point for Intel into the market.
Microsoft (MSFT), the newest and smallest competitor in the smartphone market, has hedged its bet by making Windows 8 compatible with both x86 and ARM—a huge win for Arm. Microsoft’s strategy looks a little uncertain because it is not committing to a single instruction set, but that could prove beneficial during this period of instability, and its emphasis on getting apps in HTML5 could pave the way for more hardware-agnostic implementations down the line.
Apple could be the kingmaker here. Because of Apple’s close relationship with Arm, it has been rumored that Apple could drop x86 entirely in the next few years and switch over to Arm processors for its laptops and desktops. This would make it easier to unify its mobile and desktop OSes, which many think is Apple’s long-term strategy. This would take a sizable bite out of Intel, which has been the sole supplier of Apple CPUs since its original switch to x86 back at the start of 2006.
Intel and Arm investors should prepare for a rocky couple of years. Intel’s entrance into the mobile marketplace when Medfield launches could hurt Arm, though not necessarily Apple. But if Arm continues to improve at its current rate, it could quickly become competitive in the desktop space, and infiltrate Intel’s market. Arm is also moving in exciting new directions with its heterogeneous “big.LITTLE” approach to processors which could offer great advances in battery life that may keep it in step with Intel even if Medfield succeeds. Microsoft and Apple will both continue to try to unify their mobile OSes with their desktop OSes, which will create further opportunities for both ARM and Intel to compete. Google’s position is the best. Thanks to its choices with Android’s design, it can let the chips fall where they may.
Given this changing landscape, some think that suppliers are the best way to play the mobile space. I disagree. Component suppliers will always be bullied by the bigger players. Apple is notorious for its extremely advantageous manufacturing contracts. Having Intel enter the field won’t necessarily give those manufacturers better leverage because the phones are ultimately made by the same few companies: Motorola, HTC, Samsung, Nokia, and Apple. Therefore, large caps are the best way to play.
I would rank the best investments as follows:
- AAPL - Apple continues to drive the market forward; the latest rumblings of Retina display technology for the next iPad and next year’s laptops as well will renew investor confidence in the post-Jobs era. With its plethora of cash, it can adapt regardless of which ISA wins.
- MSFT - Microsoft seems to have woken up to the potential in the mobile space, but a scattered-looking strategy may keep developers looking at other, more established platforms. While its phones may never see the kind of success that Apple and Google have, if its endeavors in the mobile sector continue to provoke innovation in its desktop OS, Windows could start to look exciting again.
- ARMH/INTC - Arm has the most to lose if Intel can deliver on Medfield’s performance but could also be a huge winner if it can begin to cannibalize Intel’s desktop market share. This all depends on how much of a control freak Apple is. If Apple wants to be in charge of chip design for its computers, it is only a matter of time before it drops Intel. Intel has been sitting pretty for some time in the desktop space but designing microchips is a race run at break-neck pace and it has stumbled hard with Atom.
Mobile computing is a market with huge growth and the potential for everyone to succeed to some degree, so it’s conceivable that a position in all of the big five above would be profitable in the long run. Still, Arm and Intel could see heightened volatility in 2012, and the loser could crash.
Disclosure: I am long AAPL. I may initiate a position in Google in the next 72 hrs.