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In the article "Computer Design Now Works Backward To Intel's Detriment" by Dana Blankenhorn, the author poses the following concern over Intel's (NASDAQ:INTC) business model:

"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."

I fundamentally disagree that Intel needs to start designing fully custom CPUs for each and every device manufacturer. Further, I feel the need to clear up a few critical points, especially with respect to Intel's competitive position against the players in the ARM (NASDAQ:ARMH) ecosystem.

A Word About Customization (Or Lack Thereof)

In the article, Mr. Blankenhorn cites the Microsoft (NASDAQ:MSFT) Surface as an example of, "design the chip around the device, then go get that chip produced at a foundry". The system-on-chip in the "RT" version of the "Surface" is an off-the-shelf Nvidia (NASDAQ:NVDA) Tegra 3, and the chip in the "Pro" version is a low power Intel Core i5. There was absolutely no "customization" here except in the fact that Microsoft chose what pre-existing chips it wanted to use.

To further illustrate my point, consider the fabless design houses such as Nvidia, Qualcomm (NASDAQ:QCOM), and Texas Instruments (NASDAQ:TXN). None of these companies actually designs a system-on-chip for a particular vendor or a particular device; the companies listed offer several grades of their system-on-chip solutions at different price, performance, and power consumption points, and it is up to the device manufacturer to choose from among them.

The entirety of the Windows Phone ecosystem (Samsung, HTC, Nokia (NYSE:NOK)), for instance, is using Qualcomm Snapdragon S4 solutions for products. Did Qualcomm custom design a processor core for each of these vendors? No. Did Qualcomm even design a new system-on-chip for each of these devices? Nope. Qualcomm has a product lineup, and it managed to sign deals with these vendors to use its chips.

The only "customization" that goes on is from the chip vendor itself, not the device manufacturer (unless, of course, it is Apple (NASDAQ:AAPL) or Samsung (OTC:SSNLF)).

Even ARM Isn't Selling Custom Designs

The big misconception that people have is that ARM's designs somehow lead the device vendors to have more customized designs than competing Intel solutions. To understand how ARM's business works, it is key to understand the two types of ARM licensees:

  1. Fully Custom: In this case, the chip designer is simply licensing the right to make an ARM compatible CPU, but will take on the responsibilities of actually doing the design work that ends up defining the chip in terms of performance, power consumption, etc. Examples of companies doing so are Apple , Qualcomm, Applied Micro (NASDAQ:AMCC), and Marvell (NASDAQ:MRVL)
  2. System-On-Chip Customization: In this case, the licensee uses a fully-designed ARM processor core and then builds a system-on-chip around the core.

In no case is ARM Holdings itself selling custom designs; it has a standard set of cores that the system-on-chip designers can either use or not use.

But the main takeaway is that, in general, it is not the device manufacturers customizing the chip solutions, but in fact the system-on-chip vendors that sell pre-packaged, complete solutions.

Conclusion

While Intel could go into the custom system-on-chip business, the truth is, it doesn't have to. The major high volume growth segments -- smartphones and tablets -- have very clearly defined parameters: the best CPU performance and the best graphics performance within a given power envelope. Plainly and simply, the off-the-shelf solutions that offer these characteristics at the right price and in the right volume will win.

Right now, Intel's hurdle to success isn't its business model or "lack of customization". It's Qualcomm, which currently has the fastest, most integrated, and most power efficient smartphone system-on-chip available. Intel has a very, very tough fight on its hands, and it will need to dial everything up to 11, from manufacturing to design, in order to have a chance at dethroning the reigning champion.

Disclosure: I am long INTC, NVDA, AMCC. 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.

Source: ARM, Intel, And Customization: Clearing Up Some Key Points