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Are Amazon and Intel About to Go to War?

By Andrew Tonner - Jan 12, 2016 at 9:19AM

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Amazon's semiconductor subsidiary has unexpectedly started selling its chips to third-party vendors. Does this mean war with Intel?

Source: Amazon

No company loves a knock-'em-down, drag-'em-out fight more than Amazon.com (AMZN 2.07%). The ecommerce titan has toppled rivals large and small over the past two decades. And a recent move suggests that it's preparing to challenge one of the technology industry's most powerful names -- Intel (INTC 1.46%)

Amazon moves into semiconductors
Annapurna Labs, Amazon's wholly owned subsidiary, will begin selling its own internally developed Alpine brand of semiconductors, noted a recent blog post. Amazon acquired the Israeli-based Annapurna Labs last year for a reported $350 million. Analysts interpreted the move as Amazon's attempt to in-source the supply of chips for its cloud-computing division, Amazon Web Services.

This made sense, given that Intel's monopoly in the space -- an estimated 99% market share of the server-chip industry -- gives it pricing power and wide margins. Meanwhile, in 2014, Gartner estimated that Amazon owned more than 2 million servers, a number that has assuredly increased since then.

This implies that Amazon has spent massive sums on Intel's highly profitable server chips. Few could blame it, then, for trying to lower AWS' cost base and reduce its reliance on a single, powerful supplier by creating its own data-center chips.

Turning to this week's news, in turn, Amazon's decision to sell Annapurna's chips to third parties comes as a surprise. Amazon typically acquires component suppliers for strategic reasons. It ceased external sales of warehouse robotics start-up Kiva Systems, for example, when it purchased the company in 2012. Given this, you'd be excused for wondering whether the ecommerce giant's latest move represents the opening shots in a war to crack Intel's dominance. 

A sign of things to come?
Although Amazon's motives are difficult to parse, it could have an interest in challenging Intel for one important reason -- profits.

The server-chip space offers ample financial opportunity for a company that can develop sophisticated chips. Intel's data center group produces operating margins of roughly 50%. If Amazon and Annapurna can match Intel's chips from a technological standpoint, Amazon could use this new market to further buoy and grow its thin-margined e-commerce business, much as it does with its AWS segment.

What's less clear is whether Amazon can match the technological sophistication of Intel's server chips. According to reports, Annapurna's Alpine chip lineup appears to support to only basic computing tasks, like storage and networking. Whether this is the result of Annapurna being unable to match Intel's massive R&D budget, or part of a calculated strategy by Annapurna and Amazon remains unclear. However, a company as historically combative as Amazon won't hesitate to take on one of the few technology companies that's equally as powerful.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. 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.

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