For years, Intel (NASDAQ:INTC) was fully focused on making powerful microprocessors for personal computers. Now it is changing its model to one that focuses on every kind of chip, from those in cars to those in phones. I think that Intel’s technological brilliance and scale will eventually prevail over the headstart that manufacturers selling chips based on ARM Holdings (NASDAQ:ARMH) have built (and so do other people, check out this poll). As battery technology improves and smartphones begin to perform more and more complicated tasks, Intel’s powerful chips will become more and more attractive to phone manufacturers. Our future phones will have “Intel Inside ®”.
To me ARM's main advantage is that of a first mover. That’s what allowed it to completely monopolise mobile chips so quickly. There is no question that with enough time Intel could have matched and beaten chips that are based on ARM’s architecture in battery life, performance, price, and suitability for tablets and phones, but ARM was just so early to market.
ARM was co-founded by Apple (NASDAQ:AAPL) (see this interesting article by the BBC) when it needed a new kind of chip that consumed low power in order to power its Newton tablet (interesting review of the Newton) in 1987. That's a huge head-start, and it explains why ARM dominated the market today.
Now let’s talk about why ARM will not hold its reign and why Intel will bring it down:
- First mover’s advantage is never enough. ARM’s advantage has been huge. As I explained earlier in this article, it got a MASSIVE head start and that’s what has made it so successful. But headstarts don’t make a company stay on top in the long term. Sure, ARM's architecture is advantageous for small, efficient chips, but Intel can adapt to that with time. Companies like Nvidia (NASDAQ:NVDA) and Qualcomm (NASDAQ:QCOM) are holding Intel down right now, but in the long run the company with the best products will eventually prevail. Apple wasn’t the first MP3 player maker. Windows was not the first OS to have a near-monopoly in computers. Apple’s iPhone was not the first touch-screen smartphone. Intel wasn’t always the chip to power Macs. Over time, things really do change, and the better products tend to win.
- Intel has the best manufacturing capabilities in the world for chips, hands down. (See this article — “They invested billions in hyperproductive plants that could crank out more processors in a day than some rivals did in a year“). This will help it wipe out that first mover’s advantage in the long-run. The moment I saw the first previews for Intel’s upcoming 22nm chips with 3D transistors (Ivy Bridge — see this article), I bought shares in Intel. That was all the confirmation I needed that Intel is superior in innovation. Ask any industry expert and the one opinion that will be consistently positive will be that on Intel’s manufacturing and technological capabilities in the long run. Just look at what the company has done to this day, at its history. Intel always delivers.
- Intel is taking care of the software. The company helped Google re-write and optimise the latest versions of Android to work perfectly with phones running the Intel architecture. Focusing on Android was a very, very smart move. The popular phones running on this platform often attract users with the sheer power of the newest processors that they feature, and if Intel chips become superior to ARM’s, manufacturers like Motorola and HTC (2498.TW) will come crawling for the newest Atom.
- Intel is signing contracts where is matters. We officially found out at CES that Motorola plans to roll out lots of Intel smartphones. This is huge news, and I think that the market under-reacted on that day. Let’s not forget that Motorola is now owned by Google (NASDAQ:GOOG). First Android gets fully optimised for Intel chips, then Motorola announces a significant partnership with Intel. Is anyone else seeing a pattern with Google’s actions here, or is it just me?
- Focusing on Android first was smart. Intel needs volume in chips, and Android’s where the volume’s at. It can convert Apple later, once its chips completely outperform the others on every level (which will happen eventually, the question is just when). And when Windows Phones take over their slice of the market, they will probably be running a version of Windows 8, which will work for both ARM and Intel. The company with the best performing chips in will be on Windows Phones in 4 years. Intel needs to deliver soon though. A head start becomes harder and harder to overturn every year the current dominant companies stay on top.
This is why I’m predicting a “critical point” (a turnaround) in Intel’s mobile chip business in the near future. Don’t miss out!
Disclosure: I am long INTC.