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It was recently noted that Intel (NASDAQ:INTC) is currently employing "guerilla" tactics to gain share in the Android smartphone chip business. In particular, Intel seems to be targeting the low end phones in emerging markets. This is an interesting approach and it's worthwhile to examine why it actually makes a lot of sense for Intel.

Work Out The Kinks Off Stage

The developed world, and in particular the U.S., is used to the myriad flashy, feature-filled, top-brand smartphones. While Intel is a powerhouse name in all higher end computing, it is a relative newcomer to the phone scene. It would have been unwise to try to push their unproven chips onto the major vendors: a single misstep in execution or product quality could be the kiss of death for Intel's plans. That's where the company's current strategy is ideal.

The idea is to work the kinks off stage in developing nations where the idea of a sturdy, reliable smartphone is still exciting and new. Most of the announced design wins use Intel's reference design but re-branded, so it is low risk for these vendors to get these designs out to market quickly. The advantages here are numerous:

  • Intel can get feedback on what worked and what didn't in the reference design and then update the next design accordingly;
  • Intel has a large, continuing role in porting Android to x86, so it can gather the feedback on any problem/quirks and quickly address them in future Android ports; and
  • If there are any problems, it is much more likely that folks in developing nations won't "raise a stink" about them.

Aim For The Low End, Still Hit High Margins

The biggest reason cited for the threat of ARM Holdings' (NASDAQ:ARMH) to Intel's PC and server business is that ARM's designs will prove to be "good enough," which will then eat away at Intel's margins and market share. However, two can apparently play that game. More people will buy low- and mid-range phones than they will high-end phones, so if Intel can maintain a healthy gross margin profile while supplying chips to inexpensive, mass market smartphones, then it will build significant share at the bottom of the food chain.

A further understated advantage Intel has here in taking the low-end phones by storm is precisely that they can do so while keeping gross margins sufficient. A traditional SoC vendor such as Qualcomm (NASDAQ:QCOM) or Texas Instruments (NASDAQ:TXN) has to pay ARM Holdings a royalty for use of the ARM instruction set, and even more if they plan to use ARM's off-the-shelf core designs such as the Cortex A9 and Cortex A15. Further, these design houses are fabless, so they have to pay for manufacturing capacity; in the event of a wafer shortage, they might even have to write big checks in order to ensure enough supply. Intel doesn't have to pay any of that. They already have the manufacturing capacity, baseband chips, core design, system-on-chip designs, and instruction set license. These savings can give Intel significant room to be aggressive on pricing.

Marching Into The High End

As Intel gains credibility, moves to smaller process nodes, tightens the integration of its chips even further, and moves to new micro-architectures, it will attempt to march to the high end. Funnily enough, high performance is Intel's turf. ARM's chips have seen widespread adoption in the mobile space primarily because their chips happened to be low power enough to fit the bill at the time (since ARM has always focused on low performance/low power solutions).

However, ARM's chips have to enter the realm of high performance; an area in which Intel has decades of experience (and ARM comparatively little). I believe that given Intel's sheer R&D muscle, process advantage, and strong road map, that they have a strong chance of finally taking the performance per watt crown and moving out of the realm of "good enough".

Conclusion

As outlined in my previous article, Intel's main problem won't be technological superiority; it'll be market penetration. I believe that Intel's design wins in emerging markets highlights Intel's keen awareness that they will need to be exceptionally clever in how they penetrate the market. I believe that their bottom up approach is the right way to go, as it allows for all of the benefits of fast paced, iterative design cycles to work out the kinks while minimizing risk.

The doom and gloom crowd is often saying that Intel "missed the boat on mobile." They missed the first boat, but the party's really just beginning. Emerging markets are huge, and consumers are fickle. If Intel can build superior technology that delivers a clear performance per watt lead coupled with competitive pricing, then Intel's marketing team will undoubtedly make sure that it'll get used. And once someone uses it, others will take notice.

Source: Examining Intel's Guerilla Approach To The Smartphone Sector