Qualcomm (NASDAQ:QCOM) announced yesterday a joint venture with the Chinese provincial government of Guizhou to build a data center based on ARM server technology. Guizhou Province will build a cluster of green data centers using more than 2.5 million servers with chips based on Qualcomm's ARM server processors. The joint venture will also focus on research and development of server chipsets for sale throughout China. Companies that vertically integrate ARM chip design and massive cloud services are in the best position to adopt ARM server technology and may speed the adoption of ARM architecture in the data center.
Leading the Charge
When Qualcomm first announced its Server Development Platform back in October 2015, I was very skeptical that it would make any inroads in the Intel (NASDAQ:INTC) dominated server business. Servers have become commoditized, and Intel dominates this commodity market.
Following Intel's 2015 Q4 earnings report, I began to wonder if Intel is really as secure in the data center as it seems. Intel appears to have given up on smartphones and lightweight tablets, unable to compete with ARM processors on cost and performance.
Intel's failure in mobile is not merely a failure of a technology (x86 processors) but a failure of a business model. Intel had hoped to apply the commodity processor model to smartphones that had worked so well in PCs. However, the industry leaders, Apple (NASDAQ:AAPL), Samsung (OTC:SSNLF) and Huawei, have all been going in the opposite direction, towards custom designed systems on chip (SOCs) that are used in the highest tier smartphones. Other, smaller smartphone companies such as LG are attempting to follow suit.
The custom SOC paradigm offers technical and business advantages. The key technical advantage is that mobile device makers can optimize the SOC design for the mobile device and potentially for the operating system (and vice versa), in the case of Apple. The business advantage is the classic one of vertical integration: profit that might have gone to the commodity processor vendor is retained within the mobile device company.
In addition to the structural advantages of the new paradigm, there appears to be a fundamental cost advantage for ARM processors that Intel could never overcome, as long as the mobile device makers could pursue the new paradigm at sufficient scale.
The custom SOC paradigm offers a template for adoption of ARM servers in the data center. Companies that have attempted to market ARM server processors following the commodity model have not met with great success. SA contributor Piyush Arora recently questioned whether AMD's (NYSE:AMD) much delayed "Seattle" ARM server chip is dead on arrival. He concluded that Seattle isn't a credible contender with Intel chips, and I think he's right.
Yohan De Gelas is a Senior Lecturer at HOWEST University of Applied Sciences in Belgium who also writes extensively for Anandtech on server technology and the server business. In his recent article on Seattle, he points to software support as the key reason why it has taken so long to bring Seattle to market.
The maturity of the software stack has been an ongoing impediment to market acceptance of non-Intel servers, as I pointed out in my article on IBM Power servers. To compete in the commodity server market, commodity software and OS solutions have to be readily available, and for ARM servers, there were often gaps.
Vertically integrated cloud service providers can find a way out of this conundrum. By virtue of controlling the software stack, as well as design of hardware down to the SOC silicon, such companies can develop a fully integrated ARM server solution. With sufficient scale, such companies can also realize the cost benefits of ARM technology relative to Intel.
This is the key to understanding the Qualcomm/Guizhou joint venture. Qualcomm hasn't just gone out and tried to peddle their server chips on the commodity market. Instead, Qualcomm has lined up a customer with a large internal chip market, who will also provide the software stack.
It's a big investment for both parties. Initial capitalization is at $280 million with 45% ownership by Qualcomm. Qualcomm is also committing a lot of valuable IP to the venture. This is probably just the start for Qualcomm. Virtually any other integrated cloud services provider that fully controls their software stack could be candidates for similar joint ventures.
Google (NASDAQ:GOOG) (NASDAQ:GOOGL) was reportedly looking for chip partners for Android, for which Qualcomm is probably the leading candidate. This can be seen as Google's way of emulating the custom SOC model without developing the in-house design capability it would otherwise need. Google could easily extend this to its servers as well.
Amazon (NASDAQ:AMZN) has been speculated as potentially developing its own ARM servers as well through its Anapurna Labs subsidiary. But the company best positioned to pursue the vertically integrated model is the company that pioneered it for mobile devices, Apple. Apple has a huge cloud services operation, as well as the design expertise in ARM processors and control of the software stack.
Whether through joint ventures such as the Qualcomm/Guizhou partnership, or standalone vertically integrated cloud providers such as Apple and Amazon, investors are being shown how Intel eventually could be toppled from its data center dominance. Qualcomm appears to be leading the charge for ARM in the data center.
This entails not-insignificant risk, but a potentially rich reward for Qualcomm should its joint venture (and others that may follow) succeeds. Qualcomm is rapidly emerging in my view as the heir apparent of Intel, by virtue of not being shackled to x86. There may well be room for only one commodity processor provider, and that could well be Qualcomm. I continue to maintain a hold rating on Qualcomm.
Disclosure: I am/we are long AAPL.
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.
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