Advanced Micro Devices (NASDAQ:AMD) has been touting the immense possibilities of ARM 64-bit chips, commonly used in tablets and smartphones, for use in servers and data centers. But, all that talk about using the chips in servers has remained mere vaporware, until now. Apparently, it's not AMD that will receive the honor of being the first to deploy the chips for data centers. Rather, the two companies that look most likely take this prize are Applied Micro Circuits (NASDAQ:AMCC), and Canonical, the parent company of Ubuntu Linux.

The two are planning to soon demonstrate their X-Gene Server-on-a-Chip. X-Gene is an ARMv8 64-bit Server-on-a-Chip package that runs up to 2.4GHz. The chip combines a 10/40 GB mixed signal I/O with what Applied Micro Devices calls ''enterprise-class memory subsystem.'' Applied Micro Devices says the X-Gene delivers four times the processor density of x86 architectures, while consuming only 50% as much power to deliver comparable, or better, performance.

AMD has hoped to replace Intel's (NASDAQ:INTC) x86 server chips with its 64-bit ARM processors, code named ''Seattle.'' The chipmaker revealed its roadmap for the revolutionary server chips last year, with the launch slated to take place in the first quarter of 2014. But, the company later pushed back the planned launch to the fourth quarter of the current fiscal year.

Meanwhile, Intel plans to stick to the x86 architecture and is betting that its Atom processor will win in the mobile and hyperscale server battle. HP's Moonshot server started with Atom, but plans to offer ARM, too.

Can Applied Micro Circuits gain meaningful traction?
The market for ARM server chips is still growing and will bring a fresh change from the highly dominant x86 server chips. Meanwhile, AMD expects to not only become the market leader in 64-bit ARM server chips, but grab 25% of the overall server chip market as well. Applied Micro looks like a wildcard at the moment, but it will be interesting to see how the space plays out.

But, if past attempts by AMD to challenge Intel's dominance in server chips are any indication, don't count on the two companies making a big dent on Intel's market share. Intel remains the market leader in x86 server chips by a wide margin. The company commands an overwhelming 97% share of the market, compared to AMD's 3%. AMD had a peak market share of 25% in 2006, but its share has been steadily declining since then. Intel and AMD are the only companies that manufacture x86 server chips. Moreover, Intel still rules the portable computer chip and desktop chip markets with a 90% and 83% market share, respectively.

A number of large chip players such as NVIDIA, Cavium, and Marvell are all lining up their own offerings. Intel is still working on its line of ARM server chips, which will muddy the waters even further for Applied Micro Circuits and AMD.

Intel server chip ASP rising
x86 server chips are extremely lucrative compared to chips used in personal computers, and sell for an average of ten times as much. The average selling price, or ASP, of Intel's server chips has actually been rising over the years, a trend that contrasts sharply with the normal product cycle for chips. Intel has seen its server chips ASP increase by 47% since 2007, from $429 to $629 currently.

Chip prices tend to gradually fall due to gains in manufacturing efficiency and competition. For instance, the ASP of Intel's chips for mobile computers has fallen 33% over the same period. However, Intel says it has not been increasing server chip prices, but rather the increase in ASP has been a result of customers opting for higher-end models.

Stabilizing market share
Although the market share of x86 server chips has been gradually coming down to the current 40%, AMD says that the share will stabilize in 2015 around 39%. Mercury Research estimates that the x86 server chip market is worth about $12 billion this year. Meanwhile, the market share of 64-bit ARM chips is expected to gradually grow through 2016, and hit a plateau with a 38% market share.

The chart below shows how the total addressable market for processors across mobile, embedded, PCs, servers, and consoles is expected to grow in the coming years. The gray bars represent Power, MIPS, Sparc, mainframe, and other proprietary chips, all lumped together.


Source: AMD

The future, therefore, seems to belong to x86 and ARM chips.

Foolish bottom line
Applied Micro Circuits, together with Canonical, is likely to become the first company to launch the much-awaited 64-bit ARM server chips for data centers ahead of AMD. ARM server chips are likely to gain a respectable market share, but probably not enough to unsettle Intel, which commands an overwhelming share of the sever chip market.

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Joseph Gacinga has no position in any stocks mentioned. 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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