Wall St. Takes the Wheel at Wintel

It now appears that Steve Ballmer was suddenly given his walking papers at the urging of an activist investor (ValueAct) and with the concurrence of Bill Gates. Wall Street’s growing impatience tends to coincide when the Innovators Dilemma scenario has taken hold of a company that has been unable to overcome its challengers. Why continue to invest in something that won’t happen when Microsoft with $80B in the bank could be bought outright with 7 years of cash flow? Intel, too is nearing a Wall St. revolt, possibly after this coming holiday season when the shift to the new mobile market will likely be more dramatic and favorable to Apple, Qualcomm and the no name Chinese ARM chip vendors. There is plenty of value to unlock at Intel, given the company can focus on its true strengths: Data Center and Foundry.

Peak Wintel occurred between the launches of Windows 2000 (Dec 1999) and Win XP (August 2001) and in the midst of Intel’s domination of the laptop market with their 32-bit x86 processors and WiFi. Both owned 100% of what was then “mobile.” However, the multi billion dollar, 64 bit Itanium side-show and an infatuation with Linux in servers blinded both to the historical primacy that computers always trend towards smaller form factors and greater mobility on account of Moore’s Law. MHz supremacy ran into a rising power wall as PC productivity anchored to the power outlet peaked. The iPhone bid anchors aweigh to all that in 2007 with productivity taking off in a new vector.

Under Steve Ballmer, profits tripled as new sales techniques maximized the squeezing of blood from the corporate turnip. Intel, at first fell behind AMD in the 64-bit server space but then doubled down, realizing without the massive profits generated by servers, there would be a much-reduced Fab and R&D budget. The data center market has been and will continue to be the new growth driver that requires maximum performance per watt and cares not at all for the energy sipping standby mode that dominates batter life in mobiles that sit more than 90% idle. More importantly it is dominated by x86 software.

The article by Paul McLellan this past week casting doubts on the imminent ramp of Intel’s 14nm process is interesting when viewed in the context of the shift that might be imposed by Wall St. Haswell notebook processors were the process driver for 22nm as Xeon server chips lagged by months, waiting for yields to reach their peak (A sound strategy for Xeon’s mega sized caches). Meanwhile 14nm Atom processors, racing to close the gap with ARM, have been delayed until 2H 2014, thus missing out on another years worth of mobile products. If Apple and Samsung continue to peel away 100% of the mobile profits then it is questionable that Intel can turn mobile Atom into a profit generating machine selling into the 40% of the market that is built by white box vendors.

What is Intel’s 14nm fab driver that requires a Q4 2013 ramp?

If the answer is Broadwell, Haswell’s 14nm successor, then I would counter by saying x86 has reached “good enough” when it comes to performance AND power consumption for an “All Day” PC. Apple, with Mac Air has demonstrated how it is possible to achieve 10-11 hours on Haswell, now it is up to Microsoft to fix Windows 8 to make the same possible with PCs. In addition, a declining market throws into question the demand for the latest and greatest processors that are offered at extreme prices when yields are low. Financially, this calls into question how soon and to what extend 14nm needs to ramp.

Think about it: today in the market their are two logic chip families that drive foundry process and volume and that is the Apple A6/A7 and Qualcomm’s latest standalone baseband and snapdragon processors. The correct business model for Intel is to ramp one of those two families in its latest process in order to remain a high volume play as with x86 of old. Mobile Atoms directed at the bottom 40% of the market requires a leading edge process to attack a trailing edge market and that is a major disconnect for the company.

If Wall St. catches wind of the new Intel, whose business model requires early, steep process ramps to churn out millions of high $$$ PC processors, than the game is likely up. The dithering while mobile Foundry opportunities pass them by with the likes of Apple, Qualcomm and Broadcom are actually a risk to its number 1 crown jewel: process technology. TSMC and Samsung, with their Apple arrangement are about to overwhelm Intel and the question becomes: can they afford 450nm, EUV and 10nm while its competitors pass them by? Wall St. may soon make the decision for them.

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