Intel's [Intel is an SVW sponsor] sale of its cell phone and handheld computer chip business to Marvell Technology Group for $600m announced earlier today, represents a change in its strategy to apply the economics of the PC industry to cell phones, smart phones, and communications equipment markets.
In the mid to late 1990s, Craig Barrett, the CEO of Intel, led efforts to expand the company's business into the fast growing cell phone and communications equipment markets. Through a series of large acquisitions totaling more than $11bn Intel built one of the world's largest communications chip businesses to become the leading provider of Internet infrastructure components.
Mr Barrett and his team saw that PC markets were maturing, and that server markets would become part of a global interconnected communications infrastructure. Intel's strategy was to extend its pole position--to providing silicon for the entire global digital communications infrastructure; and everything connected to it.
Intel wanted to provide silicon for every type of edge device, such as pocket computers, cell phones, PDAs, cameras, notebooks, PCs. And also provide the essential chips for servers and communications equipment that create the connecting foundation of the Internet.
Intel's comms business strategy was based on the assumption that it could apply the same economics that worked well in the PC industry. If it could produce powerful, off-the-shelf components that could be easily adapted to many different types of communications products, it would quickly win customers.
Intel expected that comms companies would ditch their custom chip efforts because they would be able to get to market faster using off-the-shelf Intel components.
But Intel had trouble gaining traction in its comms groups. It reorganized them several times and sent in its best trouble-shooter, senior vp Sean Maloney. For a while Mr Maloney's efforts seemed to be working and Intel was able to start publicizing some important design wins. But momentum was difficult to build, as the comms industry seemed slow to adapt and adopt, the economics of the PC industry.
Intel thought that cell phone and comms equipment makers would quickly embrace the standard components practice that helped the PC industry grow at phenomenal rates in the 1980s and 1990s.
Microsoft, Intel's longtime partner in the PC business also expected to establish its operating systems in cell phones, PDAs and other comms gear such as set top boxes.
The barrier to adoption of standard platforms was partly due to the large variety of specialized comms gear. But it was also due to the cell phone makers and comms equipment companies taking a closer look at the PC industry.
Dell, Hewlett-Packard and other leading PC makers were battling to eke out profit margins in the low single digits. Consolidation was rife in the PC industry as PC makers struggled to remain in business, and then IBM, the developer of industry standard PC platform exited the market.
Most of the value in the PC industry was captured by Intel and Microsoft while PC makers competed for slivers of the pie. The reason why Intel and Microsoft were not able to "PC-ize" the comms industry is easy to understand if you looked at the PC makers as proxies for the future of the comms companies.
Although the sale of the cell phone chips group is a bitter pill for Intel, it still remains deeply embedded in the comms business as a leading supplier of chips, and it has key technologies in Wi-Fi and WiMAX.
Plus, Intel can still attack client and infrastructure comms markets in new ways because of its ability to integrate masses of IP into ever smaller slivers of silicon.
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Q1 2006 Investor Fact Sheet
Marvell to Purchase Intel’s Communications and Application Processor Business For $600 Million