When Intel (NASDAQ: INTC ) did a whopping $54 billion in revenue during 2011, it seemed that the future was bright for this chipmaker. Record profits, record revenues, and a massive buyback all contributed to a substantial increase in earnings per share, making Intel look dirt cheap exiting the year. Further, with the promise of Intel based phones/tablets slated to come online during 2012, the path to growth seemed limitless. However, reality was much different.
The world of vertical integration
Today, Intel's biggest problem is Samsung (NASDAQOTH: SSNLF ) , which not only is the world's largest smartphone vendor (and soon to be tablet vendor), but also the only other semiconductor company with the might to build manufacturing facilities and to spend on in-house manufacturing process development. Not only that, but Samsung is a DRAM giant, a NAND giant, and – with the investments it is making in SoCs – a processor giant. Samsung is incredibly formidable.
Intel, on the other hand, manufactures SoCs. Now, while there's about $20 worth of content to be had in a typical tablet/phone SoC, Intel could have had the entire device at a great cost structure if it had made the following two purchases:
- Motorola Mobility (Google seemed happy to unload it onto Lenovo for a mere $2.9 billion)
- Micron (NASDAQ: MU )
With these assets, Intel could grow dramatically
Intel already invests an obscene amount of money on Android OS development, it already spends the dough on compilers, developing SoCs, and even exotic embedded DRAM technology. If Intel owned Micron (and if it had picked it up in 2011/2012 when the shares were inexpensive), then it would have added over $3 billion in EBITDA, and it would also own a good portion of the bill of materials that goes into a smartphone.
If Intel owned Motorola Mobility, then it would be able to leverage the Motorola brand, its own brand, and its immense software expertise to grab a good chunk of the smartphone market and do so with a favorable cost structure since it would own the production of most of the bill of materials. Of course, Motorola Mobility was losing money and this would make life difficult for Intel as a component supplier to other smartphone vendors down the line, but its competitive positioning would be much better today vis-à-vis phones.
Intel, at this point, needs to be laser focused on building the best SoCs for mobile because in order to win spots within vertically integrated Samsung (nearly 30% share of the smartphone market), it will need to be able to out-do Samsung's own processor teams. While Intel was confident that it would bring such leadership to the market with its upcoming "Broxton," the recent "surprise" from Apple with its own A7 SoC suggests that just about anything could happen with Samsung on the chip front.
If Intel owned its own devices and did its own memory, then it could have a real shot of going up against Samsung rather than trying to fight tooth and nail to be a supplier competing against Samsung's own teams. However, it seems that ship has sailed. That said, Intel can make good money as a chip supplier – but it's going to have to go through both Samsung's chip team and Qualcomm if it hopes to succeed.
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