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iPhone’s Component Ecosystem: Intel

Posted on Wednesday, Jul 25th 2007

In this post, we will be analyzing Intel as part of the series on the major players in the iPhone’s component ecosystem. In the iPhone, Intel provides a wireless flash with 32 Mbytes of NOR coupled with 16 Mbytes of SRAM for code execution.

Intel Corp. (Nasdaq: INTC) is the world’s largest chip manufacturer with revenues of $35.4 billion and 94,100 employees in 2006. Its core products include microprocessors, chip-sets, motherboards, flash memory, wired and wireless connectivity products, and communications infrastructure components. Its operations are organized into Digital Enterprise Group, Mobility Group, Flash Memory Group, Digital Home Group, Digital Health Group, and Channel Platforms Group.

Digital Enterprise Group accounted for 56% of its consolidated net revenue in 2006 and sales from microprocessors within the group accounted for 41% of its consolidated net revenue.

Mobility Group accounted for 35% of consolidated net revenue in 2006 and the sales of microprocessors within the Mobility Group made up 26% of consolidated net revenue. To focus on its core businesses, Intel sold its Xscale communications-chip division in the Mobility Group for $600 million to Marvell Technology Group, Ltd (MRVL) in Q4 2006.

Flash Memory Group made up 6% of its consolidated net revenue in 2006 and most of this revenue came in from the NOR flash memory products. It formed a joint venture, IM Flash Technologies, LLC, in 2006 with Micron (MU) for manufacturing its NAND flash memory products. It invested $1.3 billion in 2006 for a 49% in the venture. Earlier this year, Intel, STMicroelectronics (STM), and private equity firm Francisco Partners announced an agreement to form a new independent company by combining Intel’s NOR flash memory business and STMicroelectronics’ NOR and NAND flash businesses.

Another investment that Intel made in 2006 is worth $600 million in Clearwire Corporation (CLWR), a wireless Internet provider.

For its second quarter of fiscal 2007, Intel reported revenues of $8.7 billion, operating income of $1.35 billion, and earnings per share of 22 cents. This is a year-over year increase of 8% over the revenues in Q2 2006 and a decline of 2% compared to the previous quarter revenues. For the third quarter of fiscal 2007, Intel expects revenues of $9 to $9.6 billion.

Following the launch of the iPhone and release of teardown reports, Intel’s stock rose 53 cents, or more than 2 percent, to $24.27 on July 2nd. It is currently trading at $24.72.

Intel lost out on the processor design win in the iPhone but is working on a low-power, high-performance chip that could be used by iPhone’s competitors. In the long run, Apple shaking up the convergence device marketplace will play in Intel’s favor, as PC and laptop makers prepare their own counter to the iPhone’s ambition as a laptop replacement device. At the moment, the main issue that I have with the iPhone as a laptop replacement is the keyboard.

Intel’s Ultra Mobile PC initiative is the one to watch as these trends start taking shape. As I mentioned earlier, with extreme miniaturization, Power becomes a massive problem, and there are only a few companies with more low-power design capabilities than Intel. Of course, TI is another.

At the end of the day, Intel’s big win will come not from providing a piece of Flash to Apple, but more from the iPhone’s positive impact on the Ultra Mobile PC movement. [Related reading: iPhone and the Future]

As a final point, I would note that after a somewhat schizophrenic stance on the issue, Intel has recently joined MIT’s Nicholas Negroponte’s non-profit One Laptop Per Child (OLPC) initiative. The viability of this project, also, has major power supply and power consumption related concerns, and uses a processor from competitor, AMD. My guess is, Intel will learn from this project, and figure out its own for-profit strategy for the Ultra Mobile, Ultra Low Cost PC market.

Intel Corp. (INTC)

This segment is a part in the series : iPhone’s Component Ecosystem

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A reader who wants to remain anonymous sent me this by private email. I thought it is excellent perspective about some of the inside stories of Intel:

I read your article about Intel playing in the iPhone ecosystem. Unfortunately, Intel is not quite in the driver seat…..and that scares the crap out of them. The challenge they face is straight out of Christiansen’s Innovator’s Dilemma. The ‘good enough’ technology is the low-power, ARM-based processors coming from TI and now Qualcomm. ARM is a RISC-based processor with some 40 instructions and IA is CISC-based with some 200+ complex instructions. There is just no way Intel can get the same performance @ power with their IA architecture that ARM can…..in the same Die size. I have seen the models and they know
this.

Also, while Intel may be throwing off 300M processors a year, ARM-based systems now total over 2B in the cell phone market alone and as the
software ecosystem builds up around faster and more powerful multi-core ARM processors, there become a whole world of new competitors with lower
price, lower power, and higher volumes to leverage that Intel ultimately cannot compete with.

The most interesting part of this is that this means Intel is even more dependent on Microsoft than ever. The entire value proposition around
Ultra Mobile PC is based on Microsoft selling Vista with Haiku small screen interface on a UMPC device and MS is lazy and would prefer not to have
to support multiple CPUs underneath their compiler for Vista…..so if Intel can deliver on their LPIA and keep it fully IA compatible, then MS is
happy and will just sell yet another flavor of Vista on the UMPC devices.

So, in the portability market, where performance @power is king, Apple has already shown it can deliver WITHOUT IA….and it will be very hard for
them to go back.

Unfortunately, most people dont really realize that Intel’s real competitive advantage is in Manufacturing….not in CPU design and architecture. AMD has shown they can deliver a better architecture with 1/10th of the resources….but cannot match Intel’s semi process development. Guess what….Samsung can, has, and will continue to match and surpass Intel on low cost logic process. Samsung has not only the capital to compete with Intel, but they also have
a much more diversified business where they can leverage their memory business, logic business, and foundry business to average costs, process
development, and R&D….not to mention a very favorable business climate in SK.

The hiring of Eric Kim was an attempt to build brand value around their commoditizing CPU business, but thanks to a very clever power play…..that strategy has been abandoned and Eric was relegated to GM of the Digital Home Group….which really means low margin, consumer PCs…..where his processor development and chipset development all come out of the Mobility group…..so he doesn’t even control his own destiny and has been niched away in the Celeron world of chips that don’t test out quite good enough to sell into laptops and desktops. Chances are he wont stick around much longer.

Just a little food for thought.

Sramana Mitra Thursday, July 26, 2007 at 1:37 PM PT

I am completely in agreement with you that Samsung is the company to watch in this game, because they have manufacturing capability, an excellent Flash business, and good design skills. In the long run, I suspect they will become Apple’s main competitor, and perhaps less of a component provider (they are a large one now).

Intel, as I said above, is not a major component provider. And I agree that they will not compete hugely in the cell phone chip market. However, the
WinTel Laptop Replacement Device will also be a
large market/eco-system, and they already have all the relationships with Dell, HP, etc. Don’t forget the deep-pocket relationships both Intel and Microsoft have in the enterprise, as well as the enormous application momentum. ARM-based processors have nowhere near as much application momentum yet.

But overall, I agree, Intel has major challenges in navigating through the next wave of the Convergence Device trend.

Also, I very much like the idea of WinTel taking on the BOP (Base of the Pyramid) markets, where margins may be very low, but the sheer volume of the markets make them quite interesting.

Finally, no Apple doesn’t need Intel, but if Samsung becomes a threat, they will need alternate and reliable component providers who have the manufacturing prowess you highlight.

Thanks for the message.

Sramana

Sramana Mitra Thursday, July 26, 2007 at 1:51 PM PT