Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Intel's Data Center Group Has a Wide and Deep Moat

Intel (NASDAQ: INTC  ) is known as a company with a heavy reliance on the health of the PC market. However, the company's Data Center Group -- which sells server processors and related products -- has been a phenomenal business for the chip giant. While some worry that ARM (NASDAQ: ARMH  ) based vendors will start to gnaw at Intel's sales here, this business is quite robust and has a large moat around it.

Top to bottom, Intel's got you covered
The "data center" doesn't consist of one single use -- these processors and related peripherals and interconnects are used in everything from high-performance computing (think hard-core number crunching such as physics simulations) to serving up webpages. These demands require different types of chips with various performance levels and integration, so having a top-to-bottom stack of products is key for a solutions vendor.

Intel's public Data Center Group road map. Source: Intel.

While the product stack appears unmatched by any other company in the industry, there have been rumblings of large data-center operators such as (NASDAQ: AMZN  ) , Microsoft (NASDAQ: MSFT  ) , and Google (NASDAQ: GOOG  ) tinkering with the idea of designing their own processors for their specific data-center needs.

Warning: Competing with Intel is really tough
The design and validation of a world-class server processor that could even have a shot of going above and beyond what Intel offers is quite expensive. Google and Amazon, both of which have no problems investing billions in research and development, could conceivably and over the long haul develop their own solutions. However, there are a couple of issues with that:

  • Developing world-class chips is expensive. To develop a complex processor on the upcoming 16-FinFET process node from Taiwan Semiconductor (NYSE: TSM  ) costs, according to semiconductor expert Handel Jones, about $450 million-$500 million . For custom chips to be viable, the vendor would need a pipeline of at least two to three generations of designs going on at any given time.
  • Beating Intel's manufacturing lead will be tough. Intel has a clear manufacturing lead. This means Intel can pack more chips economically in a given area, and that that the actual transistors -- the building blocks of the chip -- are higher performing.

On top of these economic concerns, the bigger question is just why these companies would want to reinvent the wheel when there's a better option.

Semicustom designs make more economic and technological sense
Intel's processors are already well suited for the majority of data-center applications, but there will be specialized uses that a more customized chip may suit better. For example, Microsoft's new server technology, known as Catapult, , uses FPGAs alongside Intel Xeon processors (think of FPGAs as chip that can be "reprogrammed" to perform specific functions on the fly) in order to see an up-to 40 times' speed increase in delivering Bing search results.

In fact, probably not coincidentally, Intel just announced at the GigaOM Structure conference that it would offer a line of Xeon processors with an FPGA (from an undisclosed vendor) built together on the same package . According to Intel, for the right workload, such a solution can increase speeds by 10 times over traditional chips.

However, this is just one part of a larger scheme. As Intel transitions to a system-on-chip company, it will be able to more swiftly integrate third-party IP blocks into its Xeon processors. So, for example, if Google designed a dedicated search engine acceleration block, instead of designing the rest of the processor or system-on-chip around it, it could simply work with Intel to integrate that block onto a Xeon.

Foolish takeaway
While the impending threat of the various ARM vendors encroaching on Intel's business makes for fun headlines, and while the idea that every company with deep pockets will try to build its own chips, the economics of semiconductor manufacturing and the attendant design costs simply don't make sense, even if you're a fairly large customer like Google, Microsoft, or Facebook.

Intel's position is strong, and though no business is invulnerable, the company seems to be making all of the right moves to position itself for continued market share leadership in the data center.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 19, 2014, at 11:34 PM, raghu78 wrote:


    Just like clockwork you write atleast one article every week defending Intel' server market share and also writing how Intel will gain significantly in mobile market share. Very predictable stuff. You forget that ARM has done the difficult work of designing and verifying standard ARMv8 A57 cores and has designed coherent fabric interconnect which the ARM licensees can use. The specific accelerators can be designed and integrated easily by the customer.

    You see Intel's monopolistic pricing is not something the tech industry wishes for

    You really want to believe the rest of the entire tech industry won't make any impact on Intel's server market share. You see other than yourself everybody sees the importance of alternatives in the server market and are working diligently to build them. The key is aggressive competition and Intel will get that from AMD, ARM and OpenPOWER members like IBM, Google, Nvidia etc

    You see the world is not clueless or helpless to see that monopolies are bad for everybody. They are seeing the ill effects of AMD failing to compete. You can bet by 2020 the server market will look much different from today with Intel dominant but nowhere near a monopoly. I see their share going down to 50 - 60%.

  • Report this Comment On June 20, 2014, at 11:00 AM, FluorescentHell wrote:

    Ashraf, pay no attention to the trolls who don't understand that the legal definition of a monopoly has two aspects: market share and pricing. While Intel has the lion's share of the server market share, they cannot be considered a monopoly because their prices go down at the same time they are delivering more performance to their customers. The only thing Intel is doing to keep their market share is to continue to provide a superior product that the competition cannot match. How does this hurt consumers?

    It sounds like raghu78 recognizes that the approach of combining FPGA with server chips will be another way for Intel to provide a more competitive solution than ARMH can in the server market. Some choose to compete in the market place while others want to do it in the courtroom. When is an ARM house going to make a competitive product in the server arena? Not any time soon.

  • Report this Comment On June 20, 2014, at 1:13 PM, raghu78 wrote:


    Intel's Xeon with FPGA is a knee jerk response to Microsoft's recent presentation that they are using FPGAs to accelerate Bing search and to reduce their processing cost. If Intel was proactive they would have had the solution for Microsoft to use.

    btw ARM's business model is more flexible than Intel because you can license ARM IP including cores and coherent fabric interconnect and integrate your custom accelerators into your custom design which you can manufacture at a foundry. Funnily enough Intel could be that foundry in the future if they are serious about that business.

  • Report this Comment On June 20, 2014, at 1:20 PM, guest1 wrote:


    except the ARMy is stuck with fabs that don't have the margins to support R&D for node shrinks. As INTC shrinks their chips smaller and smaller none of the "power efficiency" of ARM chips will matter. That has already been demonstrated with 22nm Baytrail. I have the Dell 8 pro and it is just as power efficient as my iPad Air except it can do a lot of things the iPad can't. The only play that the ARMy can make is for one of the larger players to buy TSM otherwise it's just a matter of time. Whisper numbers for yields for TSM 20 nm looks to be around 50% so AAPL is paying double for their processors than what they are paying before.

  • Report this Comment On June 20, 2014, at 3:19 PM, FluorescentHell wrote:

    raghu78, you are correct that Mr. Softie is already using FPGA's... ...they are definitely not the first. The point is that Intel is addressing these needs. It doesn't matter that Intel didn't invented it. It's great that they are integrating a solution to make life easier for the downstream customers. The more Intel becomes responsive to their customers, the better it is for everyone.

  • Report this Comment On June 20, 2014, at 3:36 PM, raghu78 wrote:


    You are totally wrong. If you follow TSMC their revenue has been growing at a healthy rate while Intel revenues and profit has been shrinking. TSMC is making more profit as a percent of overall revenues than Intel.

    2013 revenue down to 52.7 billion from 54 billion in 2011. 2013 Nett profit down to 9.6 billion from 12.9 billion in 2011. (page 27)

    Page 65. Revenue up 18% from 500 billion TWD (USD 16.5 billion ) to TWD 591 billion (USD 19.5 billion). Nett Profit up from TWD 166.31 billion ( USD 5.48 billion) to TWD 188.14 billion (USD 6.2 billion)

    Intel's PC Client group revenue is down to 33 billion in 2013 from 35.6 billion in 2011. The lower revenue was primarily to due to loss of notebook sales to ARM based tablets like Apple iPad, Samsung Galaxy Tab, Google Nexus, Amazon Kindle .

    And here you are clueless saying that fabs don't have the margins to support R&D. silly guy.

    Don't worry about Apple. They know how to get the best pricing from their fab partner. btw no bleeding edge process starts off with 90% yields. Yields improve over time. Intel too delayed the 14nm ramp due to yield problems.

    btw what can the Dell Venue 8 Pro do that the iPad Air or iPad Mini with Retina cannot. Now that MS Office for iPad is available there is no advantage for Win 8 tablets. also Win 8 is nowhere near as good as iOS for a touch based tablet OS. The quality of iPad apps ecosystem is unmatched.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3000730, ~/Articles/ArticleHandler.aspx, 8/28/2015 6:35:28 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

Today's Market

updated Moments ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 3:59 PM
ARMH $42.62 Down -0.10 -0.23%
ARM Holdings CAPS Rating: **
INTC $28.42 Up +0.70 +2.53%
Intel CAPS Rating: ****
MSFT $43.93 Up +0.03 +0.07%
Microsoft CAPS Rating: ***