ARM vs Intel – The way further

In any market, firms compete for the limited market share and revenue. The payoff or returns on investment of the firms are influenced by the exogenous factors such as innovation in related technology, consumer preferences, macroeconomic conditions etc. These factors are beyond the control of firms; however, these have a direct impact on the sales and growth of the firms. Further, as firms compete for the limited market share and revenue, then the future of each firm growth is not only judged by its actions but also its competitors’ actions and reactions. In an idealistic & theoretical setting, each firm would have taken actions to maximize its returns without considering the actions of competitors and the market conditions. Both the market conditions and the competitors’ actions are unpredictable. Each firm takes some actions based on its current understanding of the competitors and market conditions. So, each firm act under bounded rationality as the dynamics of the market conditions and competitors’ actions cannot be predicted properly. Market conditions are driven by macroeconomic factors and consumer sentiments. The firm can only observe the current market state and make some guess about the future trends and then take some action in the current period. In each time period, firms attempts to take the best action, so as to maximize its long term returns on investment. There can also be some effect from the adjacent markets as well. For example, the change in price of tablet may impact the buying trend of ultra-books, in case these are substitutes. At any given point of time, firms act based on the current trends and some future expectations. In the next time period, firms observe the outcome of their actions, competitor’s action in the previous time period and the changes in market conditions, and then take action for the current time period. Thus, firms act, learn and adapt in the market. In the long run, each firm desires to maximize its rewards or profits. However, as the market expansion is limited, the conflicting objective of each firm leads to friction. Many eminent economists and mathematicians have extensively studied such competitive settings using game theory models and infinite horizon discounted cost criterion and then suggested the optimal actions and outcomes of the competing firms. In this post, I shall attempt to explore the competitive strategies adopted by firms in a market using the case study of competition between ARM and Intel in the microprocessor market.

Each firm possess certain set of capabilities that it can execute better than other firms. Sometimes it is also mentioned as core competency. These competencies push a firm away from the competitors and the firm creates a competitive advantage by differentiating its product or services from others. However, in course of time the competitive advantage based on certain set of core competency dilutes as competitors learn about this advantage and imitate it. Then, firms must move on to explore some other form of competitive advantage. Intel is vertically integrated and it has a strong presence in the PC and server segment of microprocessors market. The core competency of Intel is technological advantage as it has a long learning curve of chip design and access to fabrication unit. It can pursue shrinking the process nodes currently from 14 nm to 10 nm and maybe further. It leads the race in setting up the technological trends in the microprocessor market and then others may follow up. ARM with it fabless model of business has core competency in the ecological business model that creates network effects. As ARM supplies only microprocessor IPs, it offers flexibility to the OEMs to customize their chips as per their requirements. Samsung, Apple, Qualcomm have architectural license from ARM and thus they can modify their SoCs as per their needs. In terms of business model innovation, ARM drives the microprocessor market.

However, as mentioned earlier competitive advantage can be replicated by competitors unless those are protected by intellectual property. Intel is entering the smartphone microprocessor market aggressively, in which ARM has dominant share. ARM is also creating an eco-system from last few years to enter the server market, in which Intel has a dominant share. Going further, ARM and its partners intend to catch up with Intel in terms of process node technology going from 22 nm to 14 nm. Intel already has fab ready for 14 nm production; however, ARM partners are currently planning to reduce the process node. In terms of business model, Intel cannot completely follow ARM as the former is vertically integrated. However, Intel can do some changes around its business model to replicate something of the ecological business model. Recently, Intel agreed to manufacture ARM based chips for Altera on 14 nm node maybe to increase its fabs utilization. Further, Intel is also planning to customize its high end processors, so that clients can customize their chips. I believe Intel is slowly realizing the benefits of an ecological business model and it is attempting to pursue some options in this regard without compromising its vertically integrated business model.

Assuming that both the firms exist forever, then what would be outcome of this competition? Can we simulate this competition within the framework of game theory and then derive the optimal strategy and outcome? Last year, while defending my masters in business degree, I pursued this work as my comprehensive project. In the framework of the game, ARM and Intel were the players having some actions based on their core competencies and aspirations. Further, the exogenous impact of the market conditions was taken into factor by various market states: Bull, Bullish, Average, Bearish and Bear. Then, the game was iterated for large number of periods. In each time period, both the firms take some actions based on their current understanding of the other firm’s prior actions, current market state and the expected reward. The firms tend to take actions by which each of them can simultaneously achieve the optimal reward. A further reading on Nash Equilibrium is needed to understand the optimal payoff criterion. In each time period, the firms visit a state-action pair and each of them gets some reward. The next market state is picked up from a transition probability matrix. As the game progresses, the competitors’ knowledge about each other matures and they play rationally with less ambiguity. Finally, with this approach the cumulative payoff for each firm flattens up with no increase in subsequent periods. Thus, the market reaches equilibrium.

However, I am still wondering whether competitive effects can be modelled within the scope of theoretical framework. I believe most theoretical frameworks give good understanding of competition retrospectively. There are many variables that cannot be captured in present period: changes in customer purchasing powers, macroeconomic factors, actions of current competitors, new entrants etc. My work was limited to the quantitative simulation of the competition in the microprocessor market.

The question still remains: what is the way further in the competition between ARM and Intel considering each firm last forever? Is market equilibrium possible in this scenario and what would be the equilibrium strategies for both the firms? Is it possible to make out which firm shall win in the long term? I am not an expert in competitive market strategy; however, with my limited understanding I can just mention that each firm shall leverage its core competencies to expand their business horizon in new domains. Each firm shall jump from one emerging trend to other emerging trends to keep up pace with the market and competitor. It is impossible to derive an optimal strategy for each firm as there can be no fixed recipe for succeeding under uncertain market conditions and competitive effects. So, the strategy that each firm pursue shall be mostly emergent rather than formal in order to factor in the unpredictable market scenarios and competitive actions.

Currently, smartphones market is exploding. Many new OEMs and SoC designers are entering the market to cash on the demand. As any market becomes attractive, competition increases and thereby deteriorating the profits of competing firms. Smartphones market is already crowded with multiple offerings and OEMs struggle to differentiate their offerings from other similar products in the market. Further, there is also impact from the adjacent markets. Wearable devices are coming up and in future some of them may replace smartphones. Each firm in the smartphone market intends to differentiate their offerings. The differentiators come in areas – hardware, software, supply chain, post-sale services, disposal etc. I shall limit the scope to only hardware and software. I believe it is easier to replicate software; however, differentiation in terms of hardware will need major investment in capital and knowledge. Fabrications units such as TSMC will have to invest heavily migrating to 14 nm or further down in process technology.  ARM, Intel and few other firms such as MIPS have aspirations of dominating the smartphone microprocessor market. ARM has to struggle to maintain its dominant share with its business model innovation. Intel strives to crack ARM’s domination with technology revolution. In terms of exchange of best practices, ARM and its partners can catch up with Intel’s technology with some lead time and capital investments; however, Intel may struggle to follow up the business model innovations of the former. Currently, differentiation in smartphone segment is more limited to technology push such as true octa-core, BIG:LITTLE, symmetric processing etc; however, with adoption of smartphone saturating in the developed nations, the next big market will be developing nations such as China, India. I can assert that Indian customers seek value for money. Products with most utilitarian offering and least price shall usually crack the market. This is driving many Indian OEMs market share such as Micromax, Lava, Karbonn etc. However, price war is not an optimal answer to competition. The challenge is to pursue price reduction and customer value creation simultaneously. The current factors of competition revolve around price, battery life, performance, apps. So, it is difficult for OEMs to differentiate their offerings in the smartphone market. In such scenario, what Intel and ARM would do, so that both the price comes down and end-users value creation occurs? I believe that technology push cannot penetrate much in Indian market; a new factor of competition has to evolve. It may happen in future, we may not need high performance smartphones at all. The phone will be a stripped down version of current smartphone with excellent connectivity network. All the processing will be done in a remote cloud server. The phone shall just act as a virtual desktop providing remote connectivity to the cloud server. The memory requirement in smartphone will reduce drastically as most of the stuff shall be offloaded to the private cloud. I believe that technology enhancement may not be the only factor of competition in smartphone market. Firms should explore using technology to address customer experience in an economical way. Else, feature phones may still continue to rule the mass market in developing nations.

Both ARM and Intel are well positioned in the microprocessor market in terms of their capabilities. I believe the way further in this competition should be inclined towards understanding new emerging market trends and addressing the user needs in an economical manner. Technology push may not decide the dominant firm in long term.

My post is an attempt to understand the complex reactions and actions that firms take in a market space to gain revenue and market share. I tried to explore this using the case study of microprocessor market competition. I am not an expert either in microprocessor domain or in competitive market strategy. I just write my views with my limited understanding. I would really love to hear comments on my post.