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Qualcomm Isn't Quitting the Server Business After All

By Timothy Green – Updated Jun 14, 2018 at 8:54AM

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But it is dialing back what it hopes to accomplish.

Back in May, Bloomberg reported that mobile chip giant Qualcomm (QCOM -0.92%) was calling it quits in the server chip business. Qualcomm was reportedly planning to either shut down to sell its server chip unit just seven months after the commercial launch of its ARM-based Centriq 2400 server processor, which was aimed at taking on Intel (INTC -0.60%) in the data center.

Qualcomm President Cristiano Amon beat back that report earlier this week. Speaking to Reuters, Amon confirmed that Qualcomm was in fact not exiting the server chip business. "We are not looking at strategic options. We are not selling. We are still focused on it," Amon said.

But Qualcomm is paring back its ambitions, restructuring the server chip unit to focus on a smaller set of opportunities.

Two Qualcomm Centriq chips on a wafer.

Image source: Qualcomm.

The new plan

Qualcomm talked up the value proposition of its Centriq 2400 server chip when it launched late last year. The 48-core chip, with a list price of $1,995, offered quadruple the performance per dollar and up to 45% better performance per watt than the highest-performance Intel Xeon processor, according to Qualcomm. Those numbers suggest that Qualcomm had built a real contender.

But Qualcomm faced a problem: Server software is largely built and optimized for Intel's x86 architecture. Tossing in some of Qualcomm's ARM-based chips isn't trivial. Software needs to be recompiled and reoptimized. For any company using software from third parties, Qualcomm's chips weren't really an option.

Qualcomm now recognizes that it needs to only focus on larger companies that can overcome this hurdle. "It's very clear to us that the ARM opportunity is focused on a few players where you don't have the software x86 barrier to entry," Amon told Reuters.

Qualcomm is restructuring the server chip business to go after large internet companies, particularly in China. These include Alibaba, Tencent, and Baidu. U.S. internet companies could also be targets, but Amon was hush on that subject. These large companies tend to design their own software, and they have the resources to support non-x86 chips if the value proposition is strong enough.

This is still a major opportunity for Qualcomm. Large internet and cloud computing companies spend billions of dollars each year building out and upgrading their data centers. Scoring a few big customers would go a long way toward diversifying Qualcomm's revenue away from mobile chips and licensing.

Still a tough road ahead

While large internet companies are better equipped to support multiple chip architectures in their data centers, Qualcomm will still find chipping away at Intel's market share tough. Even for large internet companies, supporting ARM chips is not trivial.

Here's an example that illustrates this point. In 2016, Alphabet's Google announced that it was working on a server architecture that supports IBM's POWER architecture. It wasn't until early this year that a Google executive confirmed that POWER chips had been deployed in Google's data centers for production workloads. The delay may have been partially due to IBM's newest POWER9 chips only becoming available late last year. But the bottom line is that this process can take a long time, even for a massive company like Google.

Qualcomm's server ambitions are now more realistic, but the company still has a lot of work to do to convince big internet companies to go through the trouble to support its chips. This is a story that will play out over years, assuming Qualcomm doesn't call it quits for real.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Timothy Green owns shares of IBM. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Baidu, and Tencent Holdings. The Motley Fool owns shares of Qualcomm. The Motley Fool has a disclosure policy.

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