Samsung Setting Up to Challenge Intel in Servers

It's clear that Samsung has ambitions of going head-to-head with Intel in micro-servers, but can it really succeed?

Jan 1, 2014 at 9:00AM

It's no secret that Samsung (NASDAQOTH:SSNLF) is setting up to go head-to-head with Intel (NASDAQ:INTC) in the micro-server segment. A careful examination of LinkedIn profiles has shown that a number of high-profile technical personnel with server chip experience -- including the lead architect for Intel's latest Avoton low-power system-on-chip products -- have been snapped up by Samsung. Further, Samsung has begun openly advertising positions for the development of ARM-based server chips.

Samsung is throwing its hat in the ring, but it's a crowded market
The micro-server market, one that ARM (NASDAQ:ARMH) vendors have been talking about for quite a while now, is still relatively new and not particularly large. While some believe that, over the next several years, it could be a market worth $2 billion-$4 billion and a great opportunity for ARM (and its partners) to break into the server market, this is much easier said than done.

First off, there are a lot of players potentially looking at this market, including (but probably not limited to):

  • Intel
  • AMD
  • Qualcomm
  • Cavium Networks
  • Applied Micro
  • Marvell

Assuming that the industry analysts are correct and the addressable market turns out to be worth $2.5 billion by 2016, this could be a large opportunity for some of the smaller players on this list, and perhaps an interesting incremental opportunity for the larger players (although by no means a game-changer). For Samsung Semiconductor -- the second-largest semiconductor company in the world by revenue, next to Intel -- this would be a small incremental opportunity.

Can Samsung even compete with Intel?
Samsung is gigantic, but it's important to understand that Samsung's core competency isn't designing processors. The company runs a semiconductor logic foundry, but much of the heavy lifting on the actual semiconductor technology side is done by IBM and the other members of the Common Platform Alliance. Samsung's role here is really its capital expenditure muscle, on top of some tweaks to the Common Platform's process.

Additionally, while Samsung Electronics' R&D budget sits at a cool $12.41 billion (Intel's R&D stands at approximately $10.41 billion), it is spread out across many different fields, including:

  • Smartphones
  • Tablets
  • Mobile system-on-chip products
  • TVs
  • Cameras/camcorders
  • Mobile system-on-chip products
  • Micro-server chips

While it is true that there is probably some solid R&D leverage here, it's going to be an uphill battle competing in this space against Intel and the well-established x86-64 instruction set. That's not to say that it will be impossible to gain share -- Samsung will probably fight aggressively with whatever product it develops -- but Intel will make things exceptionally difficult, particularly with its structural advantages in manufacturing, software, and customer relationships.

Foolish bottom line
While there is a lot of hype around ARM-based micro-servers, and while Samsung is a giant, it is competing against an incumbent that is feverishly developing products in a bid to defend its share. Samsung can certainly afford to try its hand at this market, and it could eventually find some degree of success. But, fair warning: IBM and Oracle couldn't stand up against Intel in servers, so as powerful as Samsung is, the odds are really stacked against it here.

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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