1. © 2011 Karthik Ethirajan, all rights reserved
Consumer segment may make headline but won’t help the bottom line
Neither Intel nor Infineon have an industry leading solution for both apps processor and modem side.
Competition is stiff in this segment that encompasses mobile and internet connected devices. There is
also a lot of pressure on the gross margin in this business. Intel’s Atom core is still not power efficient
compared to the incumbent ARM based SoCs, and neither are they as integrated – two key metrics for
portable devices. It is not clear where Infineon stands with their 4G solution or adoption by any major
OEMs yet. Historical performance does not bode well for Intel in their argument that Infineon
acquisition will help them penetrate Smartphone market in a meaningful way. Prior acquisition of DSPC
and JV that resulted in Xscale processor ended up as abject failures.
SoCs that serve consumer market is a kitchen sink of IPs licensed from various specialist shops.
Imagination and Vivante for graphics core. Apical for camera sensor. Intel has historically chosen to
develop all its IPs in-house unlike its competitors. This strategy limits Intel from using the best of the
breed IPs available in the industry and increases its time to market. With SoCs, it is all about freeing the
core processor by offloading data intensive tasks (such as graphics, codecs and media) to hardware
accelerators. This goes against the grain of Intel philosophy where the primary focus has been on CPU
frequency. The power savings come from executing tasks on hardware rather than software running on
general purpose core.
The usage models of newer devices such as eReaders and Tablets are being experimented by
consumers. These are fundamentally consumption devices, eReaders more so than tablets. As the
market evolves, consumers will settle on a few form factors, likely to serve specific functions such as
eReaders, gaming, education, and others. Although laptops stand a high chance of being cannibalized
by these newer devices, it will remain as the primary device for content creation. Further, such
cannibalization will be far less impactful on the enterprise side where laptops will continue to rule for
the foreseeable future.
Intel makes a very persuasive argument about the growth of laptops, especially from consumers, in
emerging markets. They argue that when the consumer affordability of a laptop reaches 1-2 months of
their earnings, the penetration rate of PCs will double. China, Brazil and many Eastern European
countries are already at this lynch point. This expanding TAM will more than offset cannibalization of
laptop by new form factor devices. If this argument holds, Intel might have found their next major
thrust in PC sales with the potent combination of Sandy Bridge and Windows 7 in 2H11 and 2012.
Embedded market, on the other hand, holds promise
Embedded market composes of many sub-segments – industrial, smart energy, medical, automotive,
home appliances, etc. Processors that cater to this segment ranges from low performance
microcontrollers to high performance microprocessors. These markets have long product cycles,
typically 5-10 years, along with a 1-2 years design in period. As such, high quality (low defect rate) and
maintaining product SKUs over a decade are basic requirements for embedded customers. These
characteristics coupled with strong channel presence is essential to penetrating this market. Direct
customer relationship is still key to winning with major OEMs such as Denso or Honeywell. However,
vast majority of lesser known customers can only be reached and serviced through distribution channel
partners. Once designed in, the revenue stream from these segments tend to be more persistent.

2. © 2011 Karthik Ethirajan, all rights reserved
Intel’s established ecosystem of hardware (IDH/ODM), software (ISV) and system (SI) partners gives
them a leg up in general embedded market. This market is served by a myriad of processor
architectures and well entrenched players like TI, Freescale, Renesas, Atmel, and others. The margins
are usually better than consumers market, although it has to be shared with distributors.
Digital home group is a trinket
This segment is composed of smart TV popularized by the joint venture with Google. This is a growing,
albeit nascent, segment that has gained some traction with European telecom operators. Intel claims
that ~10K devices are sold every day.
Intel will ride the cloud computing wave
Unlike the consumer segment, where Intel is trying to catch the tail wind of the rise of smartphones and
tablets, Intel is in the middle of the cloud computing wave. Intel is well positioned to capitalize on the
infrastructure spend on the build out of the cloud. Adding to its traditional presence in enterprise
servers and servers for data centers, Intel is also winning designs in core network equipments like
routers and switches, storage and others. Where multi-core is just a marketing tag line for consumer
segment, they are absolutely essential and margin adder for networking business. You get paid for
incremental performance per core under a certain power envelope. x86 is not the only architecture
vying for the infrastructure dollars. Power and MIPS architectures are fairly prevalent in enterprise
networks and data centers. Many including Cavium, Netlogic, Freescale and others are also reaping the
benefit of the cloud computing wave. The TAM and growth rate for this segment is impressive enough
that it offers the best hope to offset softening of the core PC client business.
So, where should Intel put its money ?
Intel’s R&D program in transistor development is ‘revolutionary’ in their own words. Intel has not only
led the industry in terms of transitioning to the next smaller geometry in process technology, but has
done so while innovating on the transistor design. The latest 22nm move and 3D structures for
transistors will widen the gap in process technologies between Intel and the rest of the world by 2 years.
For example, HPC servers can pack a lot of MIPS in each core with a higher performing transistor
resulting in improved ASP. A smaller transistor allows producing more chips per wafer driving cost
down. As such these R&D and capital investments will support Intel in achieving its new gross margin
target of 55-65%.