Intel Faces Strong-ARM Tactics

Intel has not been a company that has historically taken challenges lightly and its ability to grind competitors to dust is well-documented. So when cofounder of ARM Hermann Hauser used a Wall Street Journal interview to predict the death of Intel's microprocessor business, it naturally created a firestorm of headlines.

The basis for this proclamation revolves around the innovative ARM business plan, the company's current dominance in portable and embedded devices, and the reluctance of Intel to dispense with its old-school beliefs and business practices. And while the latter strategies have allowed Intel to build a virtual monopoly in the PC processor market, Hauser sees this business model as a weakness going forward and as an opportunity for ARM.

Hauser believes the microprocessor industry is based on waves or periods of time where technology creates a "perfect storm" that allows a certain computer type to achieve dominance. This started with the mainframe, continuing into the desktop era, and more recently we have moved into a period of notebook superiority, which according to Hauser, will soon be dinosaurs left behind in favor of slimmer, more portable mobile devices like smartphones and tablets.

ARMed and Dangerous

ARM is a European firm that is a true powerhouse in the electronic devices market, with chips in over 95 percent of the world's mobile handsets and a major player in other important electronic sectors. This level of dominance in handsets would make even an Intel exec blush, and ARM has also expanded into consumer electronics and even has a 64-bit server chip.

The core strategy employed by ARM is a hands-off approach to chip production. The company does not produce a single piece of silicon and instead licenses its technology to third-party chipmakers like Samsung and Sharp. These licensees, in turn, use this technology to produce chips like the Xscale and Tegra.

ARM earnings derive from license fees on every chip produced under its third-party agreements. This can be a very lucrative business, and supplying a single chip for the latest Apple device can literally be worth billions in revenue. It also creates a large group of potential business allies should you need the support. Ironically, this used to be the way Intel operated, until the company stopped licensing out chip production with the release of its 386 processor.

Intel and ARM operated peaceably for a long time, with each happy to rule its respective kingdom. But with the advent of devices like the tablet and netbook, which bridge the gap between handsets and PCs, Intel and ARM both wanted a big piece of the same pie.

Microsoft has also come under fire from ARM, but this is not surprising given how closely Intel and Microsoft are linked with the PC. But it also points to how scared ARM should be over the market superiority of the Windows operating system. If ARM looks to take over from Intel as the primary hardware base for mainstream PC devices, then software is going to be the major stumbling block, as the company uses a RISC-based architecture that is incompatible with x86.

When a company like ARM controls 95 percent of the mobile handset market and has shipped over 1.5 billion chips last quarter, it holds all the cards in terms of software development, especially on a closed system like a handset. On the corporate side, however, Windows and its vast library of x86-based programs still matter and any tablet device that ignores this fact does so at its peril.

Where this starts to blur a little is with the general public market, where Intel and Windows are starting to matter less and less. Some of this is due to open-source software like Linux, but industry consolidation has brought with it a set of standards that can be ported to virtually any operating system.

Social networking, internet browsing, video playback, PDF viewing, Office document editing, and other basic applications can be programmed in an RISC language of your choice, making it easy for a handset operating system like Android, iOS or Symbian to support all these applications and more. Business users are much different and depend on a set of specialized applications that simply cannot be fully duplicated on a handset.

It is the same story on the hardware side, where a larger screen, higher performance, greater memory and storage capacity and extras like keyboards, mice and other peripherals are basic PC requirements that no handset can match. This is where netbooks have found their niche, but tablets have a chance to take the best of both worlds and supply an unprecedented combination of portability, style, features, and user-friendliness.

In the business world where smartphones are too small and notebooks are too big, the key to this battle may come down to which company can successfully make the leap to tablets and similar midsize mobile devices.

Heading Down the Oak Trail

Intel is certainly not taking the ARM challenge sitting down, and in addition to announcing its entry into the mobile handset market, the company has also confirmed production of the "Oak Trail" platform. This is an Atom-based processor plus chipset designed specifically for the tablet market, and is definitely a salvo aimed directly at the ARM camp.

The Oak Trail platform will consist of a low-power Atom CPU paired with an SM35 chipset, reportedly with up to a 50 percent drop in power consumption compared to standard Atom designs. In order to gain market share in this growing segment, Intel needs to price its Oak Trail platform aggressively, with estimates pegging this as low as $25 for the chips.

Even though we are talking about Intel, these are still first-generation parts, and cannot be expected to match ARM's offerings right out of the gate. Intel will have serious challenges competing with ARM in terms of power consumption and value, but the Atom-based Oak Trail will certainly improve in those areas in subsequent revisions. Intel has grown too used to having a power cord available on desktops and notebooks, and must adapt to the uncompromising world of fully mobile devices.

Intel will also concentrate its tablet efforts on both open-source Meego and Windows 7 implementations, with the latter sporting a higher price tag. The adoption of Meego in this tweener market segment speaks volumes of Intel's acceptance of both the current economy and the need to drive tablet prices lower.

In addition to Oak Trail, Intel also recently bought Infineon, giving it a noticeable presence in the mobile chip market. The problem is that ARM has been working hard to gain market share in mobile and tablet segments, while Intel has never been comfortable playing the "new kid on the block" role. For whatever reasons, it seems to have taken the chip giant a long time to react to this growing marketplace.

But that does not mean ARM necessarily has the advantage, as tablets have more in common with PCs than smartphones, and Intel has significant business relationships with the majority of companies looking to explore the tablet market. The ability to run existing x86 software is an advantage that cannot be measured, and the Intel brand name is equally valuable.

Then again, the physical design and lower power consumption of ARM chips make these more suited for mobile tablet devices and ARM has significant influence in that market. It might come down to whether the overall tablet market prefers a bigger smartphone or a smaller PC.

The End Is (Not) Near!

This is certainly not the first time someone has taken potshots at Intel, and over the years, it has become quite fashionable to predict the demise of the Wintel juggernaut. But here we are near the end of 2010 and in an economic downturn no less, yet the two companies seem more solid than ever.

More than ever, capitalization seems to be the real key to avoiding the pitfalls of former market leaders like IBM, Sun and DEC. Both Intel and Microsoft have ample reserves to make the move into mobile markets, and ARM is well aware of this.

Perhaps the real question is whether this "burgeoning tablet market" is truly the wave of the future, or just a fad put forward by aging baby boomers in love with the format. There certainly needs to be a product that provides the bridge from smartphones to fully equipped laptops, but many still prefer a combination of devices that cover the gamut of functionality.

Apple's first-generation iPad never aspired to this position of bridge device, preferring instead to be a bigger iPod Touch with limited connectivity and almost nonexistent business features. The iPad 2 is rumored to be on the way for Spring 2011 and with potential options like smaller form factors and USB ports for peripherals, corporate America may finally take notice of the tablet and really start the ball rolling.

Once that happens, then get ready for a knock-out brawl between Intel and ARM for hardware supremacy and a preliminary bout between Windows, Linux, iOS and Android for the tablet software market.