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9. Missing the Boat on Mobile Technology: Intel and AMD In 2014, Intel enjoyed the worlds largest market share in all segments of the global microprocessor marketservers, laptops, and desktops.1 It controlled close to 98 percent of the server market, more than 90 percent of the laptop market, and over 80 percent of the desktop market. In the desktop market, where AMD, its rival, was most competitive, Intels gross margins were over 60 percent, whereas AMD had gross margins of 30 percent. Since 1976, Intel and AMD had cross-licensing agreements, which stipulated that the two companies could use each others patents. For years the two companies had been battling it out for dominance in the microprocessor market. (See the section at the end of this chapter, Glossary of Computer Terminology.) In the mid-2000s, AMD achieved a technical lead in server technology. In 2003, it was the first to produce a 32-64-bit processor, and in its history it had other firsts, including at one time producing the top GHz clock speed and the earliest dual core central processing unit (CPU). Indeed, in 2006, AMDs gross margins actually exceeded those of Intel, but Intel fought back with its own 64-bit design and advances in manufacturing, whereas AMD chose to divest its manufacturing unit. While the two companies battled for leadership in the server, laptop, and desktop segments, both missed the mobile revolution that took place largely without them and both suffered as a result. Intel and AMD needed a plan for the future. From where would their future revenue and profits come? To what extent should they continue to compete for the same customers, each gaining at the others expense? To what extent would they be able carve out separate niches in different markets? The Mobile Revolution Intel and AMD did not anticipate and were not prepared for the mobile revolution. Because of the ascendance of smartphones and tablets over PCs, Apple, and not Intel or Microsoft, became the worlds leading computer company (see Exhibit 9.1). Apples iOS software, released in 2007, along with Googles Android, which was launched in 2008, became the most-used software in tablets and phones. Apple was in command of more than 40 percent of the U.S. smartphone and tablet device markets, and Android had about 50 percent, but whereas iOS is exclusive to Apple, Android can be found in devices produced by a variety of companies, the most prominent being Samsung. Intel made several false starts to enter the smartphone and tablet markets, but it was largely shut out. Taiwan Semiconductor and Samsung made most of the devices, including many of Apples, using ARM architecture. The British company ARM Holdings developed this architecture based on a reduced instruction set computing (RISC) design that depends on far fewer transistors than the complex processors Intel and AMD have created for servers, PCs, and laptops. ARM develops this architecture, but it does not manufacture products. In 2015, its architecture supported more than 95 percent of the smartphones and tablets used in the United States. Its simple design kept energy usage to a minimum, whereas Intels comparable architecture was complex because of its need to be compatible with the companys servers and desktop CPUs. Relying on Windows Phone software and Microsofts Surface tablet in the United States and relying on devices from companies such as ASUS, Lenovo, and Motorola in the developing world, the products Intel marketed to mobile markets were not profitable. Intel sold them at a loss so that it could gain a foothold. Compared to mobile markets, the server, laptop, and desktop markets responsible for most of Intels and AMDs revenue were in decline. In addition, Intel was vertically integrated and had high fixed costs because it both designed and manufactured its products. To support its world-leading microprocessor fabrication facilities, it had to spend a high proportion of revenue (about 20 percent) on research and development (R&D), and it had to sell products at high margins and volumes. 163 Because the products that Intel could offer for mobile markets had low margins, the company had been reluctant to sell them. ARM, Apple, Google, and, beginning in 2009, AMD, when it divested its microprocessor fabrication facilities, had different structures than Intel. None of these companies were manufacturers; they just designed products. They had contractual relations with other firms to make the products they sold. As suppliers of CPUs for laptops, PCs, and servers, how could Intel and AMD survive in a mobile world, where the business model was so different from the one to which they were accustomed? AMD was in particularly bad shape and barely profitable. Intel had taken away almost every advantage AMD had once had in microprocessors for PCs, servers, and laptops. AMD had negative revenue growth (see Exhibit 9.2) and a net annual loss of more than $0.5 billion in the second quarter of 2015 (see Exhibit 9.3). In that quarter, Intel had no revenue growth.

The Battles Between Intel and AMD When Paul Otellini took over as Intels CEO in 2005, he announced that he wanted to increase the pace of innovation.2 He believed that Intel should play a key role in creating half a dozen new and emerging technologies from wireless communications to healthcare. The company could develop integrated software and chip platforms that would be of use from the living room to the emergency room. Hector Ruiz, AMDs CEO from 20022008, was unimpressed. He quipped, People are smart enough to pick quality.... Calling something a platform doesnt guarantee quality.3 Evolving through many stages, the competitive battles between Intel and AMD had been very dynamic.4 Memory Facing what Intels first CEO Andy Grove refers to as an inflection point in 1985, Intel decided to completely abandon dynamic random access memory (DRAM) production.5 DRAMs are the most common type of semiconductor chip. They control short-term computer operations, such as software applications used, the number of applications open at the same time, and the speed at which a computer processes an application. DRAMs had been Intels main source of profits and revenues, but Japanese manufacturers, such as NEC, Mitsubishi, Fujitsu, Hitachi, and Oki, had captured 80 percent of the world market, and firms from Korea, like Samsung and Hyundai, were not far behind. Intels executives reasoned that U.S. companies could not 165 compete with large, vertically integrated Japanese and Korean firms that were the beneficiaries of substantial government assistance. Grove, in his book Only the Paranoid Survive, wrote that getting through this inflection involved considerable confusion, uncertainty, and disorder, both on a personal level...and on a strategic level...6 Microprocessors Gordon Moore founded Intel in 1968 along with Robert Noyce, who was a codiscoverer of the integrated circuit. In 1972, Moore made the famous prediction that became known as Moores Law on the doubling of microprocessor speed every 18 months Microprocessors are complex electronic circuits with transistors that allow simple instructions from hard disks, floppy disks, CD-ROMs, remote Internet servers, plug-in cartridges, and other storage devices to be carried out on a PC. In 1981, IBM selected Intels microprocessor for its PCs. The one caveat IBM made was that Intel could not be the sole supplier. Intel had to license its design to other chipmakers. The first companies to receive a license from Intel were National Semiconductor, Zilog, NEC, Fujitsu, and AMD. Because they could not compete with Intel, all of them ended up dropping out of the business except AMD. In 1993, Intel introduced the first Pentium processor. The initial launch was shaky because of a flaw in this processor. Over many calculations, the microprocessor made simple mistakes. Intel recalled all affected systems and fixed the problem, and the reissued Pentium became the processor of choice for most users. The Pentiums success enabled Intel to establish the strong brand identity of Intel Inside as a symbol of quality. The Sub-Zero Segment Jerry Sanders, AMDs charismatic founder and first CEO, came out of the same company that bred many of Intels leaders: Fairchild Industries. From 19871995, while Intel grew more than eight times, from $1.9 billion in revenues to $16.2 billion in revenues, AMDs sales more than doubled, from $1 billion to $2.5 billion. Sanders sued Intel for monopolistic practices in 1987. In the 1995 arbitration that ended the suit, Intel agreed not to take away AMDs license to make microprocessors so long as AMD did not make microprocessors that plugged into Intels motherboard and worked with Intels chipsets. This outcome meant that AMD had to have partners to help develop its own motherboard and chipset. Because AMD, unlike Intel, had to rely on partners, Sanders referred to the company as a virtual gorilla, whereas Intel was the real gorilla.7 By partnering with Via Technologies, AMD succeeded in creating a Pentium clone. It sold at a much lower price than the Pentium. Grove, Intel CEOs at the time, called the less than $1,000 computer made possible by this microprocessor the sub-zero segment. He saw it as a real threat to Intel.