Last year, Intel (NASDAQ:INTC) merged its troubled PC and mobile businesses into a single Client Computing group. Intel veteran Aicha Evans was tasked with leading the mobile unit, while Kirk Skaugen continued to lead the PC business. But last November, CEO Brian Krzanich hired Murthy Renduchintala, Qualcomm's (NASDAQ:QCOM) mobile chief, as the head of the newly created Client and Internet of Things (IoT) Businesses and Systems Architecture Group -- which included chips for PCs and any devices connected to the Internet.
That decision, which made Renduchintala Krzanich's second in command, reportedly triggered major internal conflicts. Evans and Skaugen both resigned in early April, leaving a power vacuum at the top of Intel's biggest business division. Evans had only held the position for less than a year, but Skaugen had previously been favored to become Intel's next CEO. That shakeup also means Intel's mobile business, which has been bleeding billions per year, is being left rudderless unless Renduchintala develops new turnaround strategies.
What's next for Intel's mobile business?
In the past, Intel tried to gain market share by giving smartphone and tablet makers steep discounts on its Atom chips, co-marketing deals, and financial assistance in redesigning logic boards. Those payments, known as "contra revenues," caused the mobile unit to post operating losses of $3.1 billion in 2013 and $4.2 billion in 2014.
Intel stopped reporting mobile losses separately last year, but the company claims the unit made "almost $1 billion" in profitability improvements in 2015, indicating it still likely lost around $3.2 billion. After all of those losses, Intel finished last year with a mere 1% share of the smartphone processor market. Intel is trying to gradually phase out contra revenues and improve profitability by reducing the production costs of its chips. But over the past year, rumors have flown that Asus, one of Intel's top smartphone processor customers, might start using Qualcomm processors instead.
Under Evans, Intel's mobile unit scored a few minor victories, including a design win in Xiaomi's Mi Pad 2 and potential modem shipments for the next iPhone. But Intel has been marginalized so much by Qualcomm and other ARM licensees that the only viable solution seems to be spending billions of dollars to buy tiny slivers of mobile market share.
Following Qualcomm is the wrong play
Krzanich seems to think hiring Renduchintala, who oversaw much of Qualcomm's domination of the mobile chip market, would help Intel become more competitive in smartphones. Back in 2014, Krzanich also hired Qualcomm's Amir Faintuch to co-manage its Platform Engineering Group, which designs the SoCs for Intel's IoT, wearable, and next-generation client and mobile platforms.
Krzanich's efforts to hire outsiders to disrupt Intel's insular culture were admirable, but I think poaching executives from Qualcomm wasn't the right play. The problem is that Qualcomm has been losing market share over the past few years to nimbler rivals like Taiwan-based MediaTek, which won over many OEMs with its cheaper chips. As for Faintuch and Renduchintala, both executives oversaw the development of the maligned Snapdragon 810, which experienced overheating issues and likely influenced key customers like Samsung to use in-house silicon instead. Top Qualcomm executives are also used to big compensation packages -- that's probably why Intel paid $25 million to bring Renduchintala aboard.
Following MediaTek would be the right play
Instead, Intel should have poached some top execs from MediaTek, which has a strong record of market share gains without bloated compensation packages. Or better yet, Intel could simply buy MediaTek, as analysts have suggested for years, to instantly gain control of nearly 20% of the smartphone processor market. MediaTek is also profitable, although increased R&D spending has weighed down operating profits in recent quarters.
MediaTek currently has a market cap of around $11 billion. Even if Intel pays a hefty premium and buys it for $20 billion, it would still be smarter than losing over $3 billion per year to maintain a 1% market share. By integrating MediaTek's operations into its own, Intel could pool together R&D resources to cut costs, manufacture chips at lower prices with economies of scale, and finally stop subsidizing undeserving OEMs.
Frustration at the top
In a leaked internal memo recently obtained by The Oregonian's Mike Rogoway, Renduchintala declared that after numerous project reviews over the past three months, he noticed a clear trend -- "a lack of product/customer focus in execution that is creating schedule and competitiveness gaps in our products."
Recent benchmarks certainly reveal a big performance gap between Intel's Atom Z350 and Qualcomm's Snapdragon 820, but it could be far too late for Intel to close that gap and catch up. Therefore, hiring Qualcomm's top execs simply won't save Intel's mobile business -- it must do something drastic, like buying MediaTek, or give up on the market altogether.