Intel (NASDAQ:INTC) recently acquired Saffron AI, a start-up that develops a "cognitive computing" platform similar to IBM's (NYSE:IBM) Watson, for an undisclosed price. Saffron's platform collects a wide variety of data based on topics provided by clients, then maps out similarities and relationships to better "understand" them. The process reportedly mimics human reasoning to generate insights for clients. The software then responds with a combination of natural language processing enhanced by a client-submitted vocabulary of industry-specific jargon.
Simply put, the platform gathers lots of data, crunches it much faster than humans can, and uses it to provide suggestions regarding business decisions. While owning that kind of machine learning platform helps big data companies like IBM, it might seem like an odd purchase for a chipmaker like Intel.
Let's take a closer look at why Intel bought an AI platform, and how it could impact IBM and other big data players.
Understanding Intel's long-term plan
Over the past few quarters, Intel's sales and earnings have been weighed down by two big things -- sluggish PC sales and big mobile subsidies. To diversify its business away from those two tough markets, Intel is beefing up its Internet of Things (IoT), data center, and non-volatile memory businesses -- which all posted double-digit annual sales growth last quarter.
Intel doesn't have a meaningful market share in mobile chips, but it plans to expand into the IoT market (which consists of wearables, smart appliances, and connected cars) with tiny new modules like Curie. Intel hopes that growth will complement its dominance of the PC chip market. All the data flows from IoT devices and PCs to data centers, where Intel enjoys a near-monopoly in chips.
However, many companies now want server chips that are optimized for industry-specific jobs. That's why Intel agreed to acquire Altera (NASDAQ:ALTR), which makes reprogrammable chips, for $16.7 billion earlier this year. These type of chips can also be used for AI applications. By combining its own server chips, Altera's FPGAs (field-programmable gate arrays), and Saffron's AI platform, Intel can offer companies an all-in-one data center solution that greatly widens its defensive moat against any potential competitors.
Retaliating against Big Blue
To understand where IBM fits into this story, we should remember that Big Blue once owned an Intel-based server business. However, IBM sold that business to Lenovo last year to focus on high-end mainframes designed for its own Power processors.
By bundling these servers, data analytics, cloud services, and the Watson AI platform together, IBM's Power chips could keep Intel's Xeons out of the high-end mainframe market, which handles extreme workloads for data processing. This strategy probably annoys Intel, which relies heavily on data center growth to offset weak demand for PC chips.
That's why Intel joined forces with Oracle (NYSE:ORCL) to set up a cloud computing data center that runs on Oracle's servers powered by Intel chips. The two companies recently announced that the test project, known as Apollo, was successful and ready to be marketed to enterprise customers. Oracle also announced that it would dump IBM's servers and offer Oracle-Intel servers instead.
Should IBM be worried?
IBM should interpret Intel's purchase of Saffron and its partnership with Oracle as a declaration of war to control the high-end server and mainframe market. This could be a big problem, since sales of mainframes were one of the few bright spots in IBM's business. Last quarter, when Big Blue's overall revenue declined for the 14th consecutive quarter, z Systems mainframe product revenues rose 15% annually even as total Systems Hardware revenue plunged 39%.
Intel's entrance into the AI market could also disrupt IBM's ambitious plans for Watson. Last year, IBM invested $1 billion to create a dedicated business unit for Watson, which is intended to complement the company's five "strategic imperatives" -- its cloud, data analytics, mobile, social, and security businesses. IBM CEO Ginni Rometty previously told CNBC that Watson was essentially the cognitive core of IBM's data and analytics businesses.
The key takeaway
Intel's recent moves certainly won't cripple IBM, but IBM is standing on much shakier ground than Intel. Most analysts expect worldwide PC demand to stabilize next year, which would strengthen Intel's core business. When that happens, growth in data centers, IoT, and memory chips would become complementary sources of growth instead of core ones. IBM needs its strategic imperatives to boost its sales growth back into positive territory, and Intel's roadmap for digital dominance could throw a wrench into those turnaround efforts.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of Oracle. The Motley Fool recommends 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.