Mobile Cold War is Heating Up
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Android doesn't scale on multi-core chips -- that was the claim made last week by Mike Bell, general manager of Intel’s (NASDAQ: INTC) Mobile and Communications Group. The report was revealing, not simply because Intel potentially found a snag in Google's (NASDAQ: GOOG) Android mobile OS, but because the report confirms Intel is hard at work on their mobile strategy. Intel has been widely criticized for missing the mobile revolution, but it has now rolled up its sleeves and stepped into the ring.
Post-PC Era
Dominated by tablets and mobile devices, the post-PC era is allegedly upon us. The demise of the PC may be rather overstated as IDC predicts 371 million PCs will be sold this year, and 518 million annually by 2016. IDC also predicts tablet sales will more than double by 2016, from 107 million in 2012 to 222 million in 2016.
Apple (NASDAQ: AAPL) and Google are the principal architects of this new era. Apple's iOS and Google's Android form the backbone of a duopoly in mobile, running on 90% of all mobile devices. The vast majority of those devices contain microprocessors designed by ARM Holdings' (NASDAQ: ARMH), which licenses its designs to a number of companies who manufacture the microprocessors. At the moment ARM is in an enviable position with mobile expected to grow 40% annually through 2014.
PC Goes to Heaven
In enterprise and large-scale computing the dominant position goes to Intel. Thanks in large part to Intel's relentless focus on processor speed and computing capacity, and VMware's virtualization software, modern high-end x86 based PC servers now power the majority of the Cloud, fueling another fundamental shift -- the emergence of computing as a service. The Cloud revolution is reshaping data centers all across the planet.
Strategic research firm Gartner estimates global spending on Cloud services will rise 18% this year, and will reach $22 billion by 2015. By 2016 personal storage in the Cloud will increase from 7% to 33%, and more than 50% of global 1000 companies will be storing customer data in the Cloud. Gartner further believes the personal cloud will become the PC of the people by 2014, providing users limitless scalability and nearly infinite computing resources for whatever they need to do.
In this dawning era, end-user device architecture will be far less relevant. With processor and storage intensive applications running in the Cloud, all one needs is a broadband connection and a web browser to interact with limitless computing capacity. The emphasis will shift to mobility and accessibility.
New Era Chip Wars
While Intel, the largest manufacturer of microprocessors, was busy winning the PC microprocessor war, it was much less concerned with power efficiency. ARM rose to dominance in the battery powered mobile device space using smaller, cheaper, low-powered processor designs.
Intel has now shifted its focus to mobile, redesigning the x86 architecture to be both powerful and power efficient. Based on their new 3D Tri-gate transistor architecture, Intel mobile chips allegedly consume half as much power as previous generation chips. Android mobile devices from Motorola, Lenovo and others with Intel inside should be on the market this year, turning the cold war hot, giving Intel a beachhead in mobile to work from.
ARM has countered with their own next generation Cortex designs already being manufactured by Qualcomm, Samsung and Nvidia. ARM is now attempting to move upstream to take on x86 architecture in the Cloud server market with its new 64-bit v8 architecture. Servers based on this new design may start shipping late next year. ARM is building on the premise that Cloud computing is less monolithic and well suited for their architecture.
The chip wars should get more intense over the next couple of years. One key hurdle remains before Intel achieves parity with ARM in mobile chip features -- customizability. Apple and other device makers tweak their chips to support custom sensors, device specific features and performance. Once Intel gets past this, the market will shift into a new direction.
Candy from a Baby
With its gigantic R&D budget, massive cash reserves and over four decades of manufacturing excellence, Intel will quickly tilt the field in its favor and innovate its way to dominance. Intel already shifted development into high gear -- benchmarks of the Medfield chip appear to be very competitive with ARM's Cortex A9. It's not hard to see why this battle won't be much of a challenge for Intel, their $6.5 billion R&D budget is more than ten times ARM's 2011 annual revenues.
By 2014 Intel’s new microprocessors will surpass ARM’s in performance and capability, and should be very competitive with ARM in power efficiency. At that point Apple will be forced into a key decision, whether to continue backing ARM or port their iOS to Intel x86 architecture. Apple will not risk falling behind Android in features or performance, so porting to Intel will ultimately be inevitable once it is clear Intel has the lead. Apple has done it before, converting the Mac from PowerPC to x86 architecture in 2005.
ARM’s Heavy Burden
Compare and contrast Wall Street’s expectations. On the one hand we have the most dominant chip maker in the world, the ranking leader in PC, enterprise and Cloud architecture, and on the other we have a relative newcomer with a dominant position in mobile. Let’s check the vital statistics.
Clearly, Wall Street is placing a big premium on ARM with a P/E ratio of over 52, and there are high expectations baked in with a PEG ratio of 3.08, and Forward P/E of almost 27. Judging by the numbers Wall Street appears to have counted Intel out with a P/E ratio under 11, PEG ratio of just 1.02 and Forward P/E under 10. Intel even tosses in a cool 3.25% dividend yield versus 0.71% from ARM. It’s as though Wall Street has already declared ARM the champion.
With these odds Intel has nothing to lose and ARM has all the hot air of Wall Street keeping it aloft. Stumble and you fall. The moment ARM fails to deliver perfection, Wall Street’s breath will turn to ice and ARM’s fall will be epic.
Invest wisely, my friends.
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