Mobile devices have been cannibalizing the PC market for years. Smartphones and tablets came out of nowhere, almost always built around ARM Holdings (NASDAQ:ARMH) chip designs, and started making both desktops and laptops irrelevant.
These days, PC processor giant Intel (NASDAQ:INTC) fights hard to break into the tablet and smartphone space, but smaller rival Advanced Micro Devices (NASDAQ:AMD) would rather leave well enough alone when it comes to the smartphone market.
That might come as a surprise if you noticed that AMD already introduced its own ARM-based chip solution, aimed at servers at first and tablets later on. Why sink your teeth into those specific markets for ARM chips, and not even have a nibble at the enormous smartphone segment?
Speaking at an industry conference this week, AMD executive Lisa Su shed some light on this paradox. Su, who serves as senior vice president of AMD's global business units, dug into the mobile market opportunity:
Could AMD go into mobile?" she asked rhetorically. "We could. When you look at mobile though, we should distinguish. ... Let's call it smartphones and let's call it higher-end tablets, two-in-ones, notebook PCs. We're not selecting smartphones as a market for AMD."
No bones about it -- notebook replacement tablets look juicy, but AMD simply isn't interested in the phone space. But why not?
"It's a relatively crowded market, and it's not a place that we can uniquely differentiate in a standard product," Su explained. "But when you look at the higher end of new form-factor notebooks, tablets, two-in-ones, and other mobile devices, I think you will see AMD in those -- and you will see us there with both [Intel-compatible] x86 and ARM."
To put it in plain English, AMD isn't terribly excited about fighting for table scraps in a mature market with low profit margins. That's what the smartphone sector has become, and this trend isn't likely to reverse anytime soon.
If anything, phone manufacturers will only expect even more affordable chips in the future, because they are under pricing pressure as well. Handset subsidies are going the way of the dodo bird, exposing consumers to sticker shocks that used to be hidden behind multi-year contract discounts.
So phones are getting cheaper, component prices must also drop if the handset makers want to turn a profit, and there's not much profit to be made at the bottom of this food chain. So AMD prefers to focus on tablets and other larger-format devices, where there's more room to hide a couple of extra bucks of low-level component profits. Also, smartphones have matured much further than tablets, and there's simply more room for innovation on those spacious tablet and PC bodies.
Unlike AMD, Intel can afford to chase high-volume, low-margin markets like smartphones. Over the past four quarters, AMD barely broke even on a 3.5% operating margin. At the same time, Intel saw a $9.5 billion net profit and 24% operating margins. It's not hard to see which processor designer has more room for experimentation, mistakes, and uncertain returns on investments.
On that note, Su also underscored how closely AMD is watching its profit margins. "Our goal is to be profitable throughout 2014, and I think that's a very much a important milestone for us to meet expectations," she said. "What we like you to see from the AMD team is that we are predictable."
And smartphone chips just don't deliver that predictably positive outcome, the way that servers, notebooks, and even tablets do. So don't expect AMD to touch the smartphone market, at least not in 2014. If it ever happens, that would be because the company has figured out how to provide a unique smartphone chip, with features that nobody else can match.
Easier said than done. So let AMD focus on easier, more profitable targets.
Anders Bylund owns shares of Intel. The Motley Fool recommends Apple Intel. The Motley Fool owns shares of Apple 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.