ARM vs Intel – Not a tech war

There are numerous articles available online that analyze the competition between ARM and Intel in the mobile phone microprocessor segment. I believe that technology may not play a vital factor in deciding the ultimate winner. I sincerely welcome your feedback on this post.

ARM is a design house for microprocessors. It license its microprocessor IPs that the SoC vendors integrate with other modules to develop SoC. ARM has a fabless mode of operation, in which the IPs are procured by the SoC vendors. These vendors design the complete SoC and outsource the manufacturing to the fabrication units. Revenues for ARM are generated by licensing fees and royalty. The SoC vendors supply the chips to the OEMs of mobile phones. Thus, ARM is at the top of the value chain. The eco-system is created by the SoC vendors, fabrication units and the OEMs. The profit generated distributed over the value chain. Thus, the margin of profit for ARM is less; however, this business model emphasizes on fair distribution of the profits in the eco-system, thus ensures the long term sustainability. ARM offers two types of licenses: standard and architectural. In the standard license, ARM provides a standard offering with a specified cost, performance figure and power consumption. These offerings can then be used in the SoC development. In contrast, the architectural license provides flexibility to the SoC vendors to customize the microprocessor IP as per the cost, performance and power requirements. However, this flexibility comes with an extra price. A particular combination of cost, power and performance of the microprocessor IP can be termed as a design point. Thus, ARM with its ecological business model involves a host of other companies. The success of the entire eco-system drives the revenues of each firm. This business model has also developed a host of complementary business such as ARM simulation tool providers, third party solutions, debuggger support etc. Thus, ARM acts as a platform and generate huge cross side network effects. On one side of the platform, the SoC vendors directly interact with ARM. This constitutes the money side of the platform. On the same side, further interactions takes place with the fabrication units, OEMs etc. On the other side, the third party application providers, simulation tools developer and debugger support firms are present. This side can be likened to the subsidy side of the platform with an exception that the other side can interact with this side without the intervention of ARM. ARM has become a dominant design in the microprocessor industry with a pervasive chain of mutually dependant businesses catering to different needs of the eco-system partners. The cross side network effects is developed as more SoC vendors adopt the ARM IPs, the more tools and application development happens on the other side.Thus, ARM sits in the top of a tightly coupled eco-system. ARM has around 90\% of the mobile computing microprocessor market share. From the inception, ARM designs are inclined for low power consumption. In a mobile computing, power consumption is very crucial as it decides the battery life without charging. This is one of the USPs for mobile devices. The low power consumption of ARM IPs along with its eco-system partners has managed it a dominant position in this industry.

In contrast, Intel is vertically integrated by involving in the entire chain of activities for developing microprocessors starting from the design to the manufacturing of the chips. This has provided Intel tight control over the process and reduces time to market of its products. It can also synergize the actions among the different activities and thus achieve maximum control over cost and technology. Changes in technology can be rapidly adopted and collective experience with the interactions of various units can lead to good chip design. However, there are flaws of a vertically integrated approach. The most important flaw in this business model is that the formation of an eco-system may not be possible. Intel performs all the activities in the microprocessor value chain, thus it is highly unlikely that the benefits will spread out of the firm. This restricts the possibility of formation of a sustainable eco-system. Thus, the network effect can never boost the sales of Intel unless Intel can form some alliance for sharing the benefits and thus increase the adoption of its microprocessors. Unless, the adoption has reached a critical mass, further adoption is questionable and also the complementary services such as simulation and debugger tools has to be developed within Intel. This business model restricts the spread of Intel offerings. However, with a vertically integrated model Intel margin of return in the microprocessor market is high. Intel directly supplies chips to the OEMs. Due to high margins of profit of Intel, the products with Intel powered chips are higher in price. In case, the OEMs reacting to competitive actions reduce price, then the margins of OEMs become thinner. Thus, this relation is not symbiotic, the scales weighs more towards Intel. However, the technical capabilities of Intel cannot be neglected. With decades of experience in chip development, Intel has crossed the learning curve. This experience helps Intel to have maximum control over cost  and technology.

ARM with its eco-system model is also well placed to bring out new innovations with less lead time in case all its partners are in sync. Summing all these up, technological innovation is just one of the facets of competition between ARM and Intel. The crucial decisive factor is the business model. ARM’s business model is already matured and massively adopted. In such a scenario, Intel has to disrupt this eco-system by dominating atleast one player in ARM’s eco-system consisting of SoC vendors, fabrication units, and third party application developers for ARM or even ARM itself.