Intel vs. ARM: In the Smartphone Era (Part 5)

By Guest Author Nalini Kumar Muppala

It is a tremendous victory to ARM’s business model that the Cambridge, UK-based company (with a market capitalization of $3.2 billion, $550 million in revenue and 1,740 employees) is causing executives at Intel (the semiconductor behemoth with market capitalization of $106 billion, $32.8 billion in revenue, and 83,900 employees) to lose sleep over their strategy to expand into the mobile phone, Internet devices, and embedded processor markets.

ARM is small and shows promising potential for growth. Human capital being the most important asset on an IP company, I was a little struck by the employee count not growing much in the past three years. ARM CFO Tim Score said recently that ARM could “develop technology at a steady state.” He added  that there might be a small but gradual reduction in the workforce.

Given its size and finances, ARM appears vulnerable for a takeover. Things would have been a lot easier for Intel if ARM were an isolated company in Great Britain turning out fantastic chips: Approach with an offer that ARM investors cannot refuse; go home with the golden goose in your bag. That prospect is not exciting; ARM would have ended up just a statistic. But that is not to be; in the battle of Intel vs. ARM, ARM represents the company itself and the ecosystem of companies that thrive on building products around ARM processor cores. The ecosystem is the armor against Intel.

With ARM processors powering most of today’s mobile phones, and revenue growth slowing for the past three years, ARM had to find growth elsewhere. It is stepping up its efforts to expand in the home entertainment, security, and netbook markets. This last one has put ARM in direct competition with Intel.

Apart from the upfront licensing fees, ARM makes a mere 5 to 6 cents for every chip that is built around one of its processor cores. This model ensures a long tail of revenue for each successful processor it puts out. This also means the revenue realization is slow and a function of future market share, growth and makes. A cash offer to purchase outright or to take a big stake will be hard to resist for ARM investors, especially given the uncertainty surrounding the prospect of increased competition from Intel.

The ARM ecosystem of companies has invested far too much to see ARM taken over by Intel. Just as Apple and Intel bought stakes in Imagination Technologies to protect their interests, the ecosystem companies could buy a stake in ARM just to maintain the status quo.

Intel processors are the CISC kind, whereas ARM processors are the polar opposite RISC kind. If a deal were to go through, integrating ARM into Intel would pose several challenges, of which processor kind might not be the biggest.

Although, Intel has in the past worked with ARM for its IXC1100 control plane processor, an elaborate licensing deal seems equally unlikely now. Intel would not want to be an also-ran in the ARM ecosystem.

Intel could look at other alternatives such as MIPS, the ecosystem of which is not as vibrant as ARM’s and hence would not pose a big problem for an Intel acquisition. But MIPS’s offering is not as complete as ARM’s, and Intel will most likely battle it out on its own.

In sum, I think it is unlikely that ARM would fall into Intel’s hands. At the moment ARM is the underdog and is enjoying the attention it gets and the vibe in the ecosystem, so much so that it has attracted Intel’s wrath.

Intel is not used to such intense competition and playing at low cost. The target markets – mobile handset, embedded – are high-volume, low-margin businesses for chip vendors. Intel will need to adapt to this new environment to thrive.

The consumer stands to gain due to increased competition and innovation. Existing relationships will come under some strain as the competing offerings match up better in the next year or two. Device makers will have more choice.  It will be interesting to see how this battle plays out.

This segment is part 5 in the series : Intel vs. ARM: In the Smartphone Era
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