Intel, Google, And Amazon Win All The Mobile Marbles

by: Russ Fischer

It seems that there is war getting ready to be fought in the technology world.

Here are the players:

Apple (NASDAQ:AAPL): Apple has a two front war already underway with Samsung and Google (NASDAQ:GOOG). Apple has eliminated Samsung from their supply chain in all products except the all-important "A" chip application processors. Apple has eliminated Google Maps and YouTube from Apple products, perhaps to the detriment of the claimed "superior user experience" of Apple.

Samsung: Samsung is the only fully integrated device manufacturer. They make the semiconductors, the displays, the batteries, and the memory used in smart phones and tablet computers. Samsung sells twice as many smartphones as Apple. Between their own requirements and Apple's fab business, Samsung produces half of smartphone/tablet application processors. Samsung is the world's second largest semiconductor manufacture and, as such, a significant threat to Intel.

Google: Google has absorbed the blows from Apple in YouTube and Maps. Google understands that Apple has declared war. Google's business model absolutely requires some level of control over mobile advertising "clicks." To fix this situation, Google has bought Motorola Mobility to introduce the mobile hardware required to generate the necessary mobile search clicks. Google can certainly justify selling full featured smart phones and tablets at cost, if necessary, to gain the needed search clicks, thus accelerating the commoditization of mobile devices.

Service providers: these guys, AT&T (NYSE:T), Verizon (NYSE:VZ), etc, have to be tired of sending $400 per unit in subsidies to Apple and Samsung. They will sit on the sidelines and accept any outcome, the most likely of which will be cheaper mobile devices and maybe cheaper service to the consumer.

Microsoft (NASDAQ:MSFT): Microsoft doesn't have many friends. They do have money, an interest in selling Windows, and the ability to make hardware. Microsoft has entered the market with a tablet (Surface) with the first model being ARM (NASDAQ:ARMH) powered using a crippled version of Windows 8. Microsoft also could justify a cost-plus-a-little strategy in support of its Bing search engine. Microsoft seems to be hedging its bets by planning to provide a version of Surface to be powered by Intel chips running full Windows 8. Microsoft has no smartphone yet.

Amazon (NASDAQ:AMZN): If online shopping will take place on mobile devices, Amazon will need to play a bigger role in mobile devices. Amazon can also justify selling these devices at cost or slightly above. The Kindle has been successful for Amazon using this same cost-plus-a-little strategy.

Intel (NASDAQ:INTC): Intel is the world's largest semiconductor manufacturer, with the most advanced processes. The common speculation is that Apple must leave Samsung behind as an "A" chip fab supplier. The only capable replacements are Intel (because of the desirable technology and capacity) or TSMC (NYSE:TSM), which doesn't have the capacity, at the moment, to service the Apple business. One would think the decision to use Intel, if Apple were going to use Intel, would have been made by now. Intel also has a little-discussed agreement with Google to cooperate on making the android operating system more compatible with the Intel x86 architecture. Paul Otellini, CEO of Intel, is on the Google board of directors.

ARMH: ARM Holdings has a virtual lock on the mobile application processor standard cell cores licensed and used by nearly everyone involved in mobile SoC chips. ARMH has the royalty business now (they don't manufacture chips) and are at a potential risk of losing the royalty business to Intel, if Intel is successful in the mobile chip business.

Nvidia (NASDAQ:NVDA), Qualcomm (NASDAQ:QCOM), Broadcom (BRCM), et al.: I consider these companies as pawns in the struggle that appears to be shaping up. They all hope to be on the winning side.

Let's see if we can connect some dots. Apple and Intel are either allies in this struggle or mortal enemies. I see no sign of an ongoing alliance, so the mortal enemy alternative is probably solidifying. With the fact that Intel's Otellini is on the Google board and the two companies have a mobile cooperative agreement, some level of distrust between Intel and Apple is understandable. Apple seems in the mode of sacrificing the user experience in an irrational effort to "get even" with Google while engaged in a perfectly rational effort to cut off competitor Samsung as a supplier.

I think the battle lines will be Intel/Google with possible inclusion of Amazon, conducting a full blown war against Apple and Samsung. A win by any group including Intel will affect ARMH in a not-good way.

Running in the background is the continual threat of smartphone commoditization. Intel has to "beat" Samsung in the silicon side struggle, or they risk losing the semiconductor leadership position to Samsung. Intel also needs to "beat" ARMH in an architectural side struggle, or x86 will slowly become irrelevant in favor of a "good enough" technology.

The Intel/Google axis will be very hard to beat in the long run. If Intel feels "squeezed out" of the mobile business by Apple and, separately, by Samsung, they will react vigorously to help Google to bring on an x86 powered, full function, comparable-to-iPhone, or better, Android smartphone and tablet, with full cloud synchronization to Wintel PCs, at a price that strips all profit from Apple and Samsung.

These battle lines are drawn in pencil at the moment, and could change, but soon the players will draw the battle lines in indelible ink, and the war will be public.

I think Apple has picked fights with too many others such as Adobe (NASDAQ:ADBE), Samsung, Google, maybe even Intel, to be the ultimate winner in this struggle. The impact of $200 commoditized iPhones and iPads will be devastating to Apple sales and earnings. They really need Intel as a fab, but don't seem to be moving in that direction. Apple, of course, could easily fund a dedicated fab with TSMC, but that would be 2-3 years away and a node or two behind by the time they threw the switch.

Microsoft is kind of off by itself. It needs to sell all versions of Windows and it also has to get clicks to support Bing. Microsoft has the advantage of having a full patent cross-license with Apple, which means they could do hardware with all the functionality and much of the "look" of Apple without concern of a patent legal war.

Samsung's game is a pure hardware play. There is no other motivating business model with Samsung, pure hardware. They will need all the advantages of their vertical manufacturing to keep up with a Google, Amazon, or Microsoft that will be willing to sell the "ultimate" smart phone and tablet at cost or even below, if necessary.

Intel/Google/Amazon have some of the smartest people on the planet and very real life/death motivation to win in the mobile segment for very different, but compatible and non-competitive reasons. The ultimate win for the Intel/Google alliance is so important that they will cut prices on mobile hardware continually with a set of serial negative effects on Apple and Samsung.

The only company that comes through this with margins intact is Intel. Because of the 1-2 node manufacturing advantage, they can sell at any potential competitor's cost and generate 50-60% gross margins. Google/Motorola and Amazon will become immense customers of Intel. Google and Amazon don't care about profits on the mobile hardware; they care about control and search clicks and retail sales via mobile devices in the case of Amazon.

This is beginning to look like a modern version of the razor blade business with Intel making the razor blade holder.

Disclosure: I am long INTC. 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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