Computer Design Now Works Backward, To Intel's Detriment

| About: Intel Corporation (INTC)

Microsoft's (NASDAQ:MSFT) decision to start making its own machines, in competition with its own OEMs, and Google's (NASDAQ:GOOG) decision to buy Motorola and start doing the same shows both are following Apple's (NASDAQ:AAPL) well-trod path -- to the detriment of Intel (NASDAQ:INTC).

CNET is out today with a piece about Apple's process, which in the case of the iPhone 5 starts with a custom chip design based on ARM Holdings' (NASDAQ:ARMH) architecture. The story notes that all this began at Apple's own chip design house, PA Semi, which actually finished its design in 2010. The story adds that the company plans to move toward a two-year process for new designs, following Intel's own chip-making pace.

The difference between what is being done now and what was done before is basic, and goes beyond the relative technical merits of ARM and Intel. Apple designed its own chip around the device, then produced it through a hired foundry. Intel, by contrast, makes one basic design based on the anticipated capacity of its own foundry.

While the Intel process starts at the foundry, moves to the design bench and then on to the final chip -- which has to be used in many different devices in order to succeed -- Apple started by designing a chip around its device, then moved that design to foundries with whom it has an exclusive relationship. This gives Apple chip-level control of forms and features that no rival hardware maker can match.

This is what Microsoft is moving toward with its Surface tablet and Xbox game machines. It's what Google is doing with the former Motorola unit. Start with the device, design a chip around that device, then go and get that chip produced at a foundry. It's not build a foundry, design a chip around the foundry's capabilities, then mass market that chip to all hardware makers.

Intel is in bigger trouble than anyone realizes. The company needs to offer design services to customize its offerings for each customer, and transform its production process so that it revolves around customer designs rather than mass marketed products -- or it needs to start building its own hardware. It has yet to demonstrate full capability along either path.

Disclosure: I am long INTC, GOOG, MSFT, 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.