Over the past few years, ARM Holdings (NASDAQ:ARMH) marginalized Intel (NASDAQ:INTC) in the mobile market by licensing cheap, low-powered designs to a wide variety of chipmakers. Intel, which manufactures its own chips, failed to match the price and power efficiency of earlier ARM designs.
However, under CEO Brian Krzanich, who took the helm at Intel in 2013, the company has shored up its defenses against competitive advances across the chip-making industry. Let's take a look at three key strategies which could help Intel go on the offensive and counter ARM's plans for growth.
1. Buying its way into the market
To catch up to ARM in the smartphone and tablet markets, Intel provided OEMs with samples, steep discounts, co-marketing agreements, and financial assistance to help redesign logic boards.
Those subsidies, known as "contra revenues," helped Intel buy its way back into the mobile market at a steep price. Between 2013 and 2014, operating losses at its mobile division widened from $3.1 billion to $4.2 billion. That loss was more than triple annual ARM revenue of $1.29 billion last year. Starting this year, Intel will merge its mobile and PC units, the latter of which posted an operating profit of $14.6 billion in 2014. It also plans to narrow annual mobile losses by $800 million this year.
The contra revenue strategy was costly, but it helped Intel make progress against ARM. Last year, Intel processors were shipped into 46 million tablets, claiming 20% of the non-iPad tablet market and topping ARM-licensee Qualcomm in total shipments.
ARM licensees still control over 90% of the smartphone market, but a handful of partners, like Lenovo and Asus, are also using Intel Atom chips. Meanwhile, Intel believes that SoFIA, its low-cost chipset for entry-level smartphones, might lure more budget handset makers away from ARM designs.
2. The upcoming IoT and wearables battle
The Internet of Things (IoT) market could grow from $1.9 trillion to $7.1 trillion between 2013 and 2017, according to IDC. Canalys expects wearable band shipments, fueled by the Apple Watch launch, to soar 129% year-over-year to 43.2 million units this year. To capitalize on that growth, Intel is investing heavily in both markets, which will put additional pressure on ARM.
ARM designs are already installed in a wide variety of IoT and wearable devices, including the Raspberry Pi and various Android Wear smartwatches. But over the past year, Intel signed cross-industry partnerships with Fossil, Opening Ceremony, Luxottica's Oakley, SMS Audio, and LVMH's TAG Heuer to develop new wearable devices. Meanwhile, Intel launched its first health-tracking smartwatch, the Basis Peak.
Intel also established a new IoT group to streamline its efforts with tiny modules. For example, Curie, a button-sized module, can equip any device with motion sensors, a GPS, and a Bluetooth connection. Its big brother, Edison, is a more robust mini-computer which is roughly the size of an SD card. By leveraging its strength in PCs and servers to launch these devices, Intel could curb ARM's growth in the IoT and wearables markets.
3. Locking ARM out of the PC and server markets
To diversify beyond mobile chip designs, ARM wants to expand into Intel's backyard through PCs and servers. ARM's partners previously established toeholds in the PC market with Chrome OS, Linux, and Windows RT devices, which together account for about 3% of the global market. However, Microsoft recently killed off RT with the launch of the Atom-powered Surface 3, which locks ARM out of the growing Windows 2-in-1 market.
ARM believes it can claim 10% of the server market by 2017 by selling low-priced, low-power microservers. Microservers only perform a specific function, like loading the images on a webpage, and are usually purchased in clusters. This way, companies only buy the processing power they need. By comparison, companies which buy traditional "jack of all trades" servers might overpay for unused processing power. Several chipmakers, including AMD and Texas Instruments, have already licensed ARM's server designs.
However, Intel also has a strong presence in the microserver market with its Xeon E3, Xeon D, and Atom C2000 SoCs. Since Intel is leveraging its near-monopoly in servers to sell these devices, ARM's partners could have a tough time breaking into this market.
Should ARM investors worry?
Last year, ARM revenue rose 16% annually as its pre-tax profit climbed 95%, thanks to robust demand for its mobile chip designs. However, Intel has shored up its defenses against ARM in IoT, wearables, and microservers, and it could keep winning over ARM licensees with contra revenues.
This means ARM probably will not disrupt core Intel businesses in the same way it did with mobile devices. Instead, Intel should finally be able fight back against ARM's licensees on multiple fronts.