The Death of Intel

For more than half a century, Intel (INTC) has reigned supreme as the world’s leading manufacturer of some of the most prized computer chips.

But now — after decades of dominance — the semiconductor giant is suddenly behind the eight-ball, and stuck in a market that’s evolving faster than they can keep up.

Today, we’re diving into why one of the most dominant tech names of all time could soon go the way of the Dodo bird.

Hit the link below to start the video:

Video transcript:

Welcome to Moneyball Economics.

I’m Andrew Zatlin, and today I’m going to ask and hopefully answer the question; is Intel doomed to die? Are we right now witnessing their death spiral? Are they destined to become like a Xerox where they still exist barely, but they’re just not relevant anymore after a period where they led the market?

I don’t think that’s exactly where Intel’s going, but I definitely see Intel being taken down a couple of pegs going forward.

Intel is struggling. They’ve had four CEOs in just five years. That’s a sign that they continue to fail and don’t know what to do to stop the bleeding. And when I say bleeding, I mean market share bleeding. Every year. They’re losing more and more market share. For example, the server market, the server market’s booming. Servers are the things that go into the data centers. This is what Apple, Google, Facebook, you name it, they use in their data centers.

And guess what? Intel is losing market share.

There was a time when they had a hundred percent of the market, now it’s down to 70%. They’re losing to AMD.

Same thing in the PC world. They’re losing market share to AMD, but it doesn’t stop there. There’s Nvidia NVIDIA’s come along and said, Hey, we’ve got an alternative to what you’re proposing, AMD and Intel. We call it the graphic processor (GPU). You’ve got the central processor, we’ve got the graphic processor. It’s a lot more powerful. And in data centers, that’s what they want.

Okay, to understand this Nvidia versus AMD versus Intel, let me give you an example of say cars. There’s Ford, there’s GM. They use an internal combustion engine. They have the same technology, the same concept. Well, that’s AMD and Intel. A long time ago, Intel was forced to allow AMD to copy a lot of their architecture.

Basically, they’re the Ford and GM of the semiconductor space. Now, along comes Nvidia. They’re like Tesla. They’re saying, no, no, no, no, no. You guys have one way to do it. We’ve got a different way, and they’ve been stealing market share. Slowly, slowly, slowly in the server and in the PC space.

What’s going on? How did Intel basically come to a point where they sowed their own demise?

To understand that, you’ve got to look at Intel’s business model because it’s very different from the business model that everyone else is using and everyone else is succeeding and Intel is failing.

Intel is kind of like a closed garden. They’re incredibly vertically integrated. They design the chips, they then make the chips, and then they sell the chips. That’s not the way everyone else is doing it. And the reason is because Intel was such a powerful force that if you wanted to play in the CPU world, if you wanted to sell chips into that space, you had to have your own vertical integration.

And that was a losing proposition because Intel is so massive.

Think of Intel as a simple factory. In order to be successful, a factory has to make a lot of widgets, a lot of units of stuff, and to do that, you got to keep your utilization up. The more you can utilize your factories, the faster you can bring down your unit costs and compete accordingly. And that’s the model that Andy Grove, the old CEO of Intel put in place. AMD could try to compete, but Intel had already massively overwhelmed them with their factory capacity. Intel had just so many more factories. They had more money to spend. They could continue to just build and build and build and bring the unit price down.

At the same time, they had a superior technology called the x86 chip. Again, CPUs, the engines of PCs and servers. AMD though had access to that. So AMDs competing on design and manufacturing until a few years ago.

Remember, I said that Intel sowed the seeds of their demise by boxing everyone out. It forced everyone to sort of reconsider what they could bring to the party, and they decided instead of being vertically integrated, if they could specialize, they could beat Intel.

TSM (Taiwan Semiconductor) started it. TSM came out and said, we will manufacture for you. You don’t have to put billions of dollars into these ever increasingly expensive factories. We’ll do that. We will focus on making these chips the best way possible and making them in a way and at a price where you can compete with Intel.

Fantastic idea. AMD, they say “great.” They sold their factories and just focused on design. Nvidia, same thing. They never had factories. They just focused on design and it worked fabulously. By being able to specialize, they’re able to operate much more effectively, efficiently, and cheaply. A MD is much smaller than Intel, but their market share continues to grow and grow.

It’s estimated that in the next year or two, there’ll be parity with fewer people, fewer costs. See, Intel has to compete on three levels. They have to compete with the manufacturing process, making sure that what they’re making is cutting edge. They have to compete on design, making sure that the product they’re offering is quality and they have to compete on price.

And guess what? They’re pretty much failing on all three.

What is happening is that vertically integrated business model has been called into competition and it’s losing. So what’s Intel going to do going forward?

I’m looking at what the new CEO is putting on the table, and I have to agree with it because in my mind, Intel has to unbundle. We cannot have an Intel that’s a manufacturer and a design house. You have to split them. That’s a challenge because Intel has a particular way of making things that not everybody else follows.

And Intel also doesn’t play nice with others and won’t rent out their factories.

TSM, they play well with others and they rent out their factories. Intel has an uphill battle, but in any case, I’m looking at what the CEO is doing. He’s cutting costs across the board. He’s streamlining these businesses, and that’s what you do when you get ready to spin off a business. You hack all the overhead, so it looks a lot more profitable when you sell it.

I believe that what’s going to happen is Intel will survive in two pieces. Kind of like GE. There was GE Healthcare, there was GE Nuclear Power plants, and after a while they just sort of say, you’re on your own. The difference is GE was a portfolio of products that didn’t always talk to each other. The challenge for Intel is Intel’s design House relies on the manufacturing prowess of the manufacturing arm and vice versa.

For those factories to succeed, they got to have widgets to make, and that’s the problem.

In any case, the direction will be in my mind that these will get sold off. Maybe they’ll get sold to TSM because they got the deep pockets, and they also have a need to tell Donald Trump, Hey, we’re good partners. We’re going to start building in the US. Now you pull back that curtain. They can’t really use Intel’s factories, not without ripping and gutting ’em and putting in their own manufacturing skill and their own process and their own equipment, but whatever.

It’s a way to keep Donald at bay, the wolf at the door. So what else do you do? Well, you’ve got this design house and you might think, this is great. They can become an AMD like company where they focus on design. That’s great, except they’re much bigger than AMD, so they’re going to have a problem going to market with a viable chip that is cheaper to make because their carrying costs are that much higher.

Maybe, I don’t know, ARM might buy them. It’d be really interesting to see arm, which is the rival technology that Tesla technology and the Intel technology come together. You would have massive share, massive IP value.

So between now and when the new CEO ends up hacking away and dividing this company, what could happen? Well, the burden of the factories is the first to go. That might stimulate a jump in Intel’s stock price because again, those factories are expensive to keep and maintain and run. Get rid of them.

Whether you shut ’em down completely or get some money, doesn’t matter getting rid of them. That will help ease the margin pressure on the rest of Intel. And then you can address the design house.

Maybe you start selling off bits and pieces to analog devices or other semiconductor companies. I do think Intel can emerge from this like a Phoenix from the Flames, but I also think we’re far from there.

I think it’s at least a year out. And remember, we still have the problem getting designed in a MD has been tested. Their chips work in the servers and they’re competing on price as well as performance. Intel has to come back to the table with the performance equation or cut their price or both. And once you do that, it still takes a while to get into the supply chain.

So Intel’s kind of boxed out for the next year or two, but if the CEO O does what I hope he does, which is to split Intel, I think that’s a winning solution. And I would get back into Intel in the meantime. It’s kind of like basically when do you buy in? Intel’s not going to go away. They’re going to be here, and I do think there’s an opportunity here in the near term for them to at least get some money for their IP. That would create stock price boost, but in the meantime, they’re still bleeding.

We’re in it to win it folks. Zatlin out.

Zatlin out.