praxthoughts

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.

N-WinTel

The nearly monopolistic player of the erstwhile mobile phones market of the years is loosing market share at a tremendous pace. Samsung & Apple are eroding the market share of Nokia in last few quarters and I believe if Nokia does not pursue something fundamentally different soon, its market shares will further plummet in the future. The other problem for Nokia is that the emerging market is also taken by the competitors. I am aware that this issue is bitten around in many forums; however, I want to propose a business model that may create a new eco-system in the mobile computing market.

There are many reasons that have led to failure of Nokia, and I believe some of the following points hurt Nokia hard are –

  • The over reliance on Symbian OS with a proprietary model rather than making it an open platform so that apps would have been developed.
  • Android coming up with open platform so that apps would be developed easily
  • Android is free
  • Price competition from entry segment Android based mobile phones of Samsung competing against similar phones of Nokia
  • Late realization of the value of consolidation in the mobile phones segments that was launched by Apple with iPhone

So, currently Nokia is almost struck in the middle. It neither provide a low cost benefit in the entry segment nor does it have premium differentiator product. The lower segment is taken up by Samsung Android phones. The superior segment of smart phones is shared by both Apple and Samsung. The strategy of Apple is to focus on loyal marquee customers that pay a premium for the differentiated features and the Apple experience. In contrast, Samsung offers mobile phones at each price segments addressed to customers with different price sensitivities. Each strategy has its benefits. While Apple’s strategy focuses on only innovators & early adopters by launching phones with incremental features in succession; Samsung focuses on entire spectrum of customers from innovators to laggards. The laggards are mostly price sensitive. By providing phones at low prices, Samsung attracts the laggards of its smart phones to enjoy the Samsung experience. Once the laggards are hooked on to the Samsung experience, there is a natural inclination for the current laggards to move in to the late majority and subsequently become the early adopters for the next high end Samsung phones. Samsung is benefited by the step wise ascent of the customers. Nokia is not able to address any of the market and mostly following an imitation strategy to come up with new phones with some sort of distorted positioning. Going forward, Nokia should do something different to address this issue. I believe the solution is not straightforward especially in a market dominated by network effects; however, Nokia should attempt to utilize its current internal capabilities and alliances to form a sustainable eco-system where both the aspiration of Nokia and its allies are fulfilled.

Strengths Aspirations Existing relations
Nokia solid mobile phones OEM experience check the loss of market share to Apple & Samsung Nokia phones with windows OS
Microsoft strong experience in OS lead the mobile phone OS segment
Microsoft strong experience in OS lead the mobile phone OS segment WinTel
Intel strong expertise in chip manufacturing lead the mobile phone SoC segment

In the above table, it is evident that each of the firm is aspiring to dominate the mobile phones & tablets market in their respective segments. Nokia wants to stop the falling market share of mobile phones, Intel aspires to gather share of the microprocessors segment of this market, which is currently dominated by ARM and further Microsoft is competing against Android for prominence in the mobile phones OS segment. All these players have a common purpose of dominating in their individual segments in various spheres of mobile phones and tablets industry. I believe an alliance among these firms can provide them effective competing grounds against the incumbents or market leaders. Microsoft is the connection between Intel and Nokia. This connection should be leveraged by forming a multi partner alliance. Isolated technology may not be able to crack the market; an eco-system has to be developed among these firms to attract market attention.

I believe there will be many counter arguments for this strategy; however, it is a basic theory that to compete in a market dominated by network effects, a late entrant or a loosing firm should focus on its existing strengths and consolidate its efforts to a niche segment, in which it has an edge over the dominating incumbents. It is easy to get off track and believe that as the market is expanding, the entrants should launch wide variety of products. The rationale for this wide product portfolio is the belief that the expanding market will consume small quantities of each product and thus the market share will increase. Apart from the fact that network effects cannot be countered with such a strategy, there are other vital points that the firms missed in this strategy. First of all, a variety of products will increase the development cost. Second, multi homing cost is increased for the complementary offerings such as apps. For e.g, app developer can develop apps for iOS on an ARM platform. However, for Windows, an app developer has to develop for both Windows RT (ARM based) and Windows Phone 8(x86 based). So, I believe a striped down approach is better than competing in all segments of the market.

How the alliance would benefit each player?

For any mobile phones to succeed, an ecosystem has to be present around it. The platform should provide large number of apps and the app developers should be willing to creating new apps continuously. Currently, Android has a huge app developer base that is increasing the number of apps at a tremendous pace. In order to counteract the growing prominence of Android, a focused approach by the new alliance on increasing the number of apps will pay off. I believe that now each firm is focusing on increasing the compatible app base independently. Intel wants x86 compiled apps, Nokia & Windows wants windows apps; however, this leads to additional efforts for the limited app developer community due to high multi homing cost. The developers needs to provide various flavors of apps to accommodate the needs of each firm such as Windows + ARM compiled apps, Windows + x86 compiled apps. Further, due to limited spread of Windows based phones, there is less incentive for developers to concentrate on Windows rather than concentrating on iOS and Android. With a coherent strategy among Intel, Microsoft and Nokia, each of the firm will invest in developing apps for the Windows + x86 platform and this may lead to enhanced app base in less time. The focus should be on reducing the lead time for creating the app base as currently the migration to smart phones from feature phones is happening at a rapid rate. Customers will choose among the current offerings in the market that is dominated by Android based products on ARM platform. Once, the adoption has reached a critical mass, it is difficult to displace the dominant product offering factoring the value addition to the money side of the platform, i.e, end users and the subsidy side of the platform, i.e, app developers, third party support tools service providers etc. The endowment effect will also go against the entrants as the customers may not be influenced for switching unless the price of the new product is much below the price of the existing product. Thus, time is critical for Nokia, Windows & Intel.

Currently, ARM dominates more than 95% share of the microprocessor segment for mobile phones and it has partnered along with many SoC vendors by licensing its IPs. ARM has developed a sustainable eco-system around its IPs with the debugger tools and simulation environment. So, there is a huge network effect favoring ARM. There is a fundamental difference in the business model of Intel and ARM. ARM license its IPs to SoC vendor firms such as Qualcomm, Nvidia, MediaTek etc. Intel is vertically integrated and markets its chips to the OEMs directly bypassing the SoC vendors. However, most of the OEMs have partnered with the SoC vendors and thus procure SoC from them. It is a good question to ask how Intel would loosen up the ties and get attraction from the OEMs. Taking a pragmatic view, it is difficult for Intel to succeed in the mobile computing microprocessor market with the current market structure. WinTel has created hegemony in the PC industry; however, due to dwindling PC market and rising prominence of mobile computing, it is natural for Intel to enter the mobile computing microprocessor market. However, with the current prominence of ARM platforms, Intel is yet to provide a tangible value proposition to switch to x86 platform. It is highly likely that the OEMs shall still continue using ARM platforms. So, in my view Intel should start with limiting the OEM partnership to a small section. Recently, Intel has entered into agreement with Lenovo, Motorola, Samsung and may be few more OEMs for its x86 processors on mobile phones; however, it is questionable that Intel would soon overtake the ARM based offerings of the OEMs. Nokia is struggling with dwindling market share. I believe Intel should partner along with Nokia to establish its x86 platform. Nokia still has good brand value; the only lacunae of Nokia + Windows smart phones is the absence of large number of apps that an Android platform can provide. Microsoft, on the other hand, should focus more on continuing its ties with Intel for developing Windows phone OS compatible to Intel’s platform. I suggest that these 3 firms should form an alliance focused on cracking the mobile computing market by having dedicated actions on developing their offerings complemented by the offerings of the other firms. All these players are classic examples of how big firms are driven by inertia of past success misses to align to the new emerging trend. The synergies among these firms may complement each other offerings by enhancing the value proposition of the bundled offering, i.e, Nokia phones on Windows phone OS with x86 platform having a large number of apps.

I am yet to address the fundamental question on what is it’s for end users? Why the end users will be inclined to buy a Nokia phone with Windows OS on an x86 platform? What difference does it make for the end users whether it mobile phone has an x86 based SoC or an ARM based SoC? The success of the alliance hinges on these questions. A one on one comparison of features among the latest smart phones may not give many differentiators. The innovation cycle has diluted means now most smart phones have features that the users may not use. The demand of the features has fallen behind the supply. The entire focus is shifting towards convergence of utilities. The smart phones is not just a phone, it is a panacea for all needs. Apps are the major differentiator that makes this possible. Walk into any mobile phone store, the key pitch of sales person for Android based phones is the number of apps. I believe currently Nokia, Windows and Intel are working independently to increase the compatible apps for their respective platforms. Such a narrow strategy of focusing on its own platform will not close the gap created by the late entry in the smart phone market. A cohesive strategy among Nokia, Intel and Windows will definitely fulfill aspirations of each of the firm. Intel and Microsoft should expand their WinTel alliance to encompass Nokia and thus forming N-WinTel.

I am not an expert in this domain; however, with my limited understanding this is my view point. I would really love to get critical comments on this, so that I can further improve my logic or completely trash out my thoughts.