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Technology Stocks : Intel Corporation (INTC)
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From: Don Green6/26/2018 10:28:17 AM
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Intel and the Danger of Integration
Posted on Monday, June 25, 2018

Last week Brian Krzanich resigned as the CEO of Intel after violating the company’s non-fraternization policy. The details of Krzanich’s departure, though, ultimately don’t matter: his tenure was an abject failure, the extent of which is only now coming into view.

Intel’s Obsolete OpportunityWhen Krzanich was appointed CEO in 2013 it was already clear that arguably the most important company in Silicon Valley’s history was in trouble: PCs, long Intel’s chief money-maker, were in decline, leaving the company ever more reliant on the sale of high-end chips to data centers; Intel had effectively zero presence in mobile, the industry’s other major growth area.

Still, I framed the situation that faced Krzanich as an opportunity, and drew a comparison to the challenges that faced the legendary Andy Grove three decades ago:

By the 1980s, though, it was the microprocessor business, fueled by the IBM PC, that was driving growth, while the DRAM business was fully commoditized and dominated by Japanese manufacturers. Yet Intel still fashioned itself a memory company. That was their identity, come hell or high water.

By 1986, said high water was rapidly threatening to drag Intel under. In fact, 1986 remains the only year in Intel’s history that they made a loss. Global overcapacity had caused DRAM prices to plummet, and Intel, rapidly becoming one of the smallest players in DRAM, felt the pain severely. It was in this climate of doom and gloom that Grove took over as CEO. And, in a highly emotional yet patently obvious decision, he once and for all got Intel out of the memory manufacturing business.

Intel was already the best microprocessor design company in the world. They just needed to accept and embrace their destiny.

Fast forward to the challenge that faced Krzanich:

It is into a climate of doom and gloom that Krzanich is taking over as CEO. And, in what will be a highly emotional yet increasingly obvious decision, he ought to commit Intel to the chip manufacturing business, i.e. manufacturing chips according to other companies’ designs.

Intel is already the best microprocessor manufacturing company in the world. They need to accept and embrace their destiny.

That article is now out of date: in a remarkable turn of events, Intel has lost its manufacturing lead. Ben Bajarin wrote last week in Intel’s Moment of Truth:

Not only has the competition caught Intel they have surpassed them. TSMC is now sampling on 7nm and AMD will ship their architecture on 7nm technology in both servers and client PCs ahead of Intel. For those who know their history, this is the first time AMD has ever beat Intel to a process node. Not only that, but AMD will likely have at least an 18 month lead on Intel with 7nm, and I view that as conservative.

As Bajarin notes, 7nm for TSMC (or Samsung or Global Foundries) isn’t necessarily better than Intel’s 10nm; chip-labeling isn’t what it used to be. The problem is that Intel’s 10nm process isn’t close to shipping at volume, and the competition’s 7nm processes are. Intel is behind, and its insistence on integration bears a large part of the blame.

Intel’s Integrated ModelIntel, like Microsoft, had its fortunes made by IBM: eager to get the PC an increasingly vocal section of its customer base demanded out the door, the mainframe maker outsourced much of the technology to third party vendors, the most important being an operating system from Microsoft and a processor from Intel. The impact of the former decision was the formation of an entire ecosystem centered around MS-DOS, and eventually Windows, cementing Microsoft’s dominance.

Intel was a slightly different story; while an operating system was simply bits on a disk, and thus easily duplicated for all of the PCs IBM would go on to sell, a processor was a physical device that needed to be manufactured. To that end IBM insisted on having a “second source”, that is, a second non-Intel manufacturer for Intel’s chips. Intel chose AMD, and licensed first the 8086 and 8088 designs that were in the original IBM PC, and later, again under pressure from IBM, the 80286 design; the latter was particularly important because it was designed to be upward compatible with everything that followed.

This laid the groundwork for Intel’s strategy — and immense profitability — for the next 35 years. First off, the dominance of Intel’s x86 design was assured thanks to its integration with DOS/Windows: specifically, DOS/Windows created a two-sided market of developers and PC users, and DOS/Windows ran on x86.

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