Intel at the Turning Point (2018.6, by Kazuyuki Motohashi) 1. Intel s Profit-Making Model Intel s ability to make high profits is supported by their excellent skills in creating a mechanism for making money. Having said that, even Intel did not categorically understand the potentials of MPUs at the very beginning. The personal computer was not even included in the list of about 50 office devices, for which MPUs were considered to be used. The global PC market expanded rapidly with the arrival of the IBM PCs in 1981. At that point in time, the leading player in the PC industry was IBM, and Intel was a mere supplier. If they have continued to supply MPUs for PC use mindlessly, however, they would have faced the likelihood of falling into price competition with other companies that manufacture MPUs, which are compatible with Intel s MPUs, such as AMD. The falling price of PCs had escalated with the arrival of new manufacturers, such as USbased Dell. There was a visible trend to use low-price compatible MPUs. How is Intel managing to avoid the price competition that semiconductor manufacturers are prone to fall into, and maintain its high 80% world share in the market for PC-use MPUs? Intel believed that they would eventually stuck in the same rut as with DRAM if they continued to just sell MPUs themselves. It thus moved to transform itself from a mere supplier to a firm leading the evolution of PCs. It has built the mechanisms for making money, which is what Silicon Valley firms are good at, in other words, the construction of a platform strategy. A platform strategy is a mechanism which enables you to sell your own products in the market favorably. Intel set up Intel Architecture Labs dedicated for R&D related to the platform. One of its achievements was the chipset embedding the high-speed PCI bus. A bus is the path, through which all data and control signals inside a PC pass. The highspeed PCI bus, developed by Intel Architecture Labs at the beginning of the 1990s, worked most efficiently with Intel s MPUs. PC makers using the PCI bus were forced to use Intel MPUs. Providing technology to Taiwanese makers of motherboards (the circuit board containing the PC s main electronic components) on condition that they had to use Intel products also helped create an environment where Intel products had to be used. Intel came up with the revolutionary (for a semiconductor maker) branding strategy as seen in the Intel Inside campaign. Intel also succeeded in eliminating the competition by every means possible with the attitude of unhesitating to be sued. These led to a situation where the OS (basic software) market was led by Microsoft and the MPU market 1
by Intel since the mid-1980s. Notwithstanding tumbling PC prices, the prices for products of these two companies, which had already established the de facto standard, remained stable. It goes without saying that the two companies enjoyed hefty profits during the period of the PC s ascendancy. 2. Changes in the Market and Holes in the Profit-Making Model The price of a single PC-use MPU is several hundred dollars; therefore, you can yield massive profits if you manage to gain high shares in the MPU market. While Intel had been celebrating the arrival of spring in the world, however, problems were unfolding at its feet. In the April-June quarter of 2015, Intel booked 5% reduction in the consolidated revenue, compared to the same period in the previous year, as well as 25% reduction in profits (based on sales profits). Intel experienced its first drop in revenues and profits in two years. The performance of the client computing business (mainly for PCs), which accounted for about 60% of their sales, declined with the revenues down of 14% and the profit down of 38%. The reason behind this was the shrinking PC market. The worldwide volume of PC shipments had been declining for three straight years from the peak volume of 370 million units in 2011, driven by the increased penetration rate and the emergence of smartphones and tablets. Intel s late response in starting to manufacture mobile-use MPUs also caused them damage. The front key player in the mobile-use MPU market and behind-the-scene key player in the smartphone-use MPU market was UK-based ARM. ARM, a company specializing in the design of CPUs (central processing units), sells schematics to Apple in the US and Samsung in Korea, giving it a global share of 90% in CPUs for use in smartphones. Smartphone makers like Apple have a system to differentiate their products via internal development of peripheral features such as communications and image processing. Intel also launched their products for the mobile market in 2008, however, they failed to put a dent in ARM s stronghold. Their mobile division booked a massive operating loss of USD 4.2 billion in the fiscal year ending December 2014. Starting in the fiscal year ending December 2015, the mobile division was merged with their PC division, making it a part of their client computing business. In place of eking out money in the PC business, where Intel makes profits now lies in the data center business. The profits in the data center business, which is responsible for server-use MPUs, jumped up 10% year over year in the consolidated financial statements for the April-June quarter of 2015. Although its operating profit was unchanged year over year, the data center business has turned into a cash cow bringing the company more profits than the PC division (Figs. 2 and 3). Intel also focuses on the IoT market. In an 2
effort to achieve greater working efficiency and/or increase the value added of services, IoT involves connecting a wide variety of objects to the network. The number of connected objects is expected to grow from approximately 15 billion in 2015 to over 50 billion in 2020. GE provides the OS for IIC, and Intel provides the gateways for connecting objects to the network and the ultra-miniaturized computers such as Edison (the size of a stamp) and Curie (the size of a button). Intel is also developing solutions in partnership with other companies. Figure: Intel s sale share by category (2014) The business for data centers and IoT, however, is a much different matter than the PC business, in which it was possible to mass produce limited types of products. Intel has an dominant share primarily in the high-end in the server-use chip market. The server market is exploding in size; however, the needs vary vastly from the high-end to the low-end. There may be high-end servers for use by Japanese financial institutions, which must not go down under any circumstances. On the other hand, some overseas data centers connect many low-end servers so that some of the servers can make up for the others in case of going down. Reduced power consumption is also becoming more important in products destined for data centers, which consume massive amounts of electricity. One trend is to install the type of semiconductors called FPGAs that consume less power in one s own data center, as is the case for. Products targeting the IoT market are even trickier. Since the objects to 3
be connected can range from industrial equipment to cars or even cows, it is crucial for the devices to be compact, low-energy consuming and mass-producible in multiple varieties; their unit prices are also low. The IoT market is at the stage where many companies see commercial opportunities and are rushing in. With several consortiums having been formed, it is impossible to predict which camp will take the lead (Fig 7). Intel s competition is seen to be Qualcomm. Yet with the wide range of needs in the market and many types of objects to be connected, it is unlikely that a single company will attain market dominance as was the case for PCs. Table: A list of IoT consortium Industry (mainly Industry 4.0 2013.11 manufacturing) Industry, Medical, Industrial Internet 2014.03 Transportation Consortium (IIC) etc. AllSeen Alliance 2013.12 Smart home Smart home, Open Interconnect 2014.07 Office, Industry, Consortium Automobile Akateck, Siemens, Bosch, SAP.. Founding members are GE, AT&T, Cisco, IBM and Intel. Participants include Japanese and European Qualcomm, Haier, LG electronics, Panasonic, Sharp etc. Intel, Cisco, GE, Broadcom, Dell, Samsun, IBM etc. A consortium of university, industry and government by German policy initiative. Integrating production technology and ICT for next generaltion manufacturing process. A US private initiatives lead by GE. Interlligent solution using IOT for various industrial equipment Open project of smart home solution, based on "All Joyn", a platform developed A open source consortium to ensure interoperability of senors Q1: What are the differences between the PC business where Intel has maintained competitive superiority and the data center business? What about the IoT business? Q2: Is a platform strategy possible in the data center business? Can an ecosystem be formed? Q3: In the IoT business, will a winner-take-all company emerge as Google did? If so, which company might it be (refer to the table of IoT alliances)? Or do you think such company will not emerge? Why? Note 1: Data center (ASCII.jp Digital Glossary) A dedicated facility for holding large amounts of data. Connected to high-speed circuits from multiple communications providers, equipped with UPS and on-site power generation facilities, with excellent security and earthquake resistance. Users of data centers include companies wanting to build their own servers efficiently, businesses running portal sites, and application service providers (ASPs), among others. The advantages for businesses include the availability to have high-capacity communication 4
lines, reduced costs for the maintenance and management of services and other devices, and security. In general, the data center provides the space to install the server, while the user installs the server computer and communication devices such as routers. This is known as colocation service (housing service). In some cases, the data center will also provide hosting services, in which it prepares the server equipment in advance and rents it to the user. Note 2: Case study of using IoT in a factory: the smart factory (IoT News, IoT Glossary) A smart factory is one which meets the conditions for an environment to maximize profits by connecting all machineries within the factory to an internet environment, capturing and storing detailed information of the machinery operations, and using this information to operate the entire factory more efficiently. For example, Germany is moving ahead with an initiative called Industrie 4.0, a national project. In concrete terms, under this program, industrial structures, particularly the entire manufacturing sector, are to be connected digitally to achieve improved efficiency and quality across the sector, thereby making German products more internationally competitive with increasing profits throughout the industry. Positioned as an important mean of achieving the objectives mentioned above, this Industrie 4.0 will play a central role in making German factories smart. References Tomomi, N (2015), Intel on the turing point, Toray Management Research Sensor 2015,October (in Japanese) 5