Many are using the resignation of ARM CEO Warren East, as reported by The Guardian, as an excuse to pound the table for a grand Intel counter-attack, as in this Motley Fool piece from Mark Hibben, written just last week.
I’m sorry. But Intel’s problems are much deeper than those people think.
Intel’s Real Problem
I owned Intel Corporation (NASDAQ:INTC) stock for about 15 years. I have followed it as a reporter for 30 years. While it’s certainly possible Intel could gain share on ARM in the future, those who predict it so confidently don’t know what they are talking about.
ARM Holdings plc (ADR) (NASDAQ:ARMH) is not Advanced Micro Devices, Inc. (NYSE:AMD). It’s not Texas Instruments Incorporated (NASDAQ:TXN). It’s not even International Business Machines Corp. (NYSE:IBM), which made the PowerPC chip. It’s not a chip maker at all. It’s a design house. It’s in the business of licensing its designs to anyone who wants microprocessors, and its the leader in low-power designs.
Compared with Intel, ARM Holdings plc (ADR) (NASDAQ:ARMH) is a gnat on an elephant. It may do $500 million in business during a calendar year. Intel does more than 100 times more, over $50 billion.
The difference is that Intel Corporation (NASDAQ:INTC) does not just design chips. It makes chips, and it has a huge bureaucracy dedicated to selling chips. The chips it sells are Intel chips, and they’re compatible with other Intel chips. The company is scaled to the needs of Moore’s Second Law, which holds that as chips grow in complexity they cost more to produce.
The problem here is that companies like Apple Inc. (NASDAQ:AAPL) don’t care about compatibility. They care about control. By licensing an ARM design, by tweaking it through their own people, and by ordering its production in quantity through, say, a Samsung chip foundry, Apple maintains absolute control over its hardware.
Chinese OEMs don’t care about compatibility either. They want orders. They don’t want to design, they want to produce. They don’t want to buy chips, they want to sell production. Intel Corporation (NASDAQ:INTC) has failed for over a decade to understand this, and that’s why it lost the mobile game, not just to ARM Holdings plc (ADR) (NASDAQ:ARMH) but to companies like QUALCOMM, Inc. (NASDAQ:QCOM) and Broadcom Corporation (NASDAQ:BRCM), which accommodate this need.