by Jean-Louis Gassée

The Smartphone 2.0 era has destroyed many companies: Nokia, Blackberry, Palm… Will Intel be another victim, either as a result of the proposed Broadcom-Qualcomm combination, or as a consequence of a suicidal defensive move?

In November 2017, Broadcom (revenue $17.6B, market cap $104B) announced its intent to acquire Qualcomm (revenue $22.9B, market cap $93B). Simplifying for today’s purposes, these two companies make a range of competing and complementary chips used in networking and wireless applications. Notably, Qualcomm makes Snapdragon CPUs for smartphones and wireless modems that connect mobile devices to cellular networks. Broadcom fields an impressive (if indiscriminate) product portfolio, the result of a series of corporate accretions.

In spite of its successful record of Mergers and Acquisitions (M&A), Broadcom’s proposal didn’t go over well.

First, it looks very expensive: Broadcom’s opening bid was $130B. Qualcomm recently let it be known they’d consider $160B.

Second, it raises national security concerns. Avago, a Singaporean company, acquired Broadcom — and assumed the more recognized name — in 2016. To conciliate US objections, Avago/Broadcom now promises to redomicile itself in the US.

Finally, the combined entity might be too big, anti-competitive. Of course, this is the idea: combine corporate bodies to achieve better “supply harmony” a.k.a. pricing power. But is it really “too big”? The combined revenue of the two companies is in the $40B range; compare that to the $200B or more achieved by real giants such as Amazon or Apple.

Or let’s see that $40B next to the $63B earned in 2017 by Intel, the subject of this examination.

Intel sees the Qualcomm+Broadcom combination as an existential threat, an urgent one. But rather than going to the Feds to try and scuttle the deal through a long and uncertain process, Intel is rumored to be “working with advisors” (in plainer English, the company’s Investment Bankers) on a countermove: acquire Broadcom.

Why the sudden sense of urgency? What is the existential threat? And wouldn’t the always risky move of combining two cultures, employees, and physical plants introduce an even greater peril?

To begin with, the threat to Intel’s business isn’t new; the company has been at risk for more than a decade. By declining Steve Jobs’ proposal to make the original iPhone CPU in 2005, Intel missed a huge opportunity. The company’s disbelief in Apple’s ambitious forecast was badly mistaken: More than 1.8 billion iOS devices have been sold thus far.

Intel passed on the biggest product wave the industry has seen, bigger than the PC. Samsung and now TSMC manufacture iPhone CPUs. Just as important, there are billions of Android-powered machines, as well. One doesn’t have to assume 100% share in the smartphone CPU market to see Intel’s gigantic loss.

One may wonder why then-CEO Paul Otellini didn’t make Apple an offer they couldn’t refuse: Access to Intel’s superior silicon manufacturing technology. At the time, Apple had nothing; Intel held all the cards.

But a poison had infected Intel execs’ minds, creating a durable Reality Distortion Field. The poison was the company’s rightfully celebrated history — Intel put the silicon in Silicon Valley, after all — and, even more poisonous: Wintel. The company didn’t have a complete Windows CPU monopoly but they depended on Microsoft for its x86 margins

A few years later, after the dramatic rise of ARM-powered smartphones, Intel execs’ faith in Wintel was unshaken: “The temporary advantage these less sophisticated, Windows-less ARM chips are enjoying will be erased by the superior silicon manufacturing process of the x86. It’s nothing…”

Wintel-friendly mavens were desperate to endorse the theory [as always, edits and emphasis mine]:

“Another reason to trust in the resiliency of the Wintel era is the staying power of the more traditional PC, [David Stinner, president of solutions-provider US itek Group] said. It’s too early to tell whether the Wintel reign will waver in the tablet and smartphone space, but Intel and Microsoft will always be powerhouses in the desktop and notebook markets. And this second group, though overshadowed at times by today’s mobility hype, isn’t going away any time soon…”

Solution Providers: Intel Smartphones, ‘Wintel’ Here To Stay

(The CRN article from 2012 is worth reading for the unintended humor and hubris: “‘The best of Intel computing is coming to smartphones,’ [Intel CEO Paul] Otellini told the audience.” But let’s be kind…it’s so easy to see the future as a linear continuation of the past.)

Watching Intel execs wince at the evocation of this dogma confirms the reality of its power.

And the poison works like this. Picture equally meritorious CPU chips: same manufacturing cost, same processing power, thermal dissipation, etc. One runs Windows, the other doesn’t. Which one sells at a higher price/profit? ‘We were lucky’ becomes ‘We know what we’re doing’.

Intel execs aren’t completely blind. Year after year they’ve tried other product avenues, from server farms to bubble memories and, more recently, IoT, Wearables, Autonomous Vehicles technology…but they’ve yet to find an outlet that has the size and “juice” of chips running Windows (and now cloud servers).

As a result, Intel products may seem haphazard — non-volatile memories, programmable chips, IoT products, self-driving technology (MobileEye was dumped by Tesla and acquired by Intel last year) — but they’re powered by a single workhorse: The x86 chips that make up more than 80% of Intel's revenue and close to 100% of it’s profit. How would an acquisition of Broadcom/Avago’s truly random product portfolio — wireless “solutions”, storage adaptors, fibre channel networking — fit into Intel’s monomaniacal culture?

But perhaps the ultimate source of urgency for Intel is the resolution of Qualcomm vs Apple.

Belatedly, Intel realized it needed a seat at the smartphone table. Despite troubles with its more advanced manufacturing processes, the company managed to supply some wireless modems for the iPhone 7, 8 and X. Ironically, the alliance was aided by a long standing and bitter intellectual property dispute between Apple and Qualcomm. If Broadcom’s acquisition of Qualcomm proceeds, the dispute with Apple could disappear:

“…Broadcom is already an Apple parts supplier, and it wouldn’t want to jeopardize a good relationship with a negotiation over royalties. The exact percentage that Qualcomm charges in royalties is of the utmost importance to a standalone Qualcomm…But for a merged Broadcom-Qualcomm, the exact amount of the royalty would be less important than a good working relationship with Apple.”

If the dispute is settled, Intel loses its wireless modems deal with Apple. No mobile CPUs + no modems = nothing of substance. Broadcom would be in charge — they would hold all the cards.

Is it any wonder that Intel wants to find ways to scuttle the deal?

What would be worse: being pushed further away from the mobile feast by a Broadcom-Qualcomm combination, or led to an organization and product morass by fee-hungry bankers?

In the end, Intel’s best hope might lie in a stalemate, no Broadcom-Qualcomm transaction, no suicidal Broadcom acquisition.

— JLG@mondaynote.com