Intel Wants to be the Microsoft of Hardware (Premium)

I was interested to read an interview with Intel CEO Bob Swan in which he describes how important it is for his firm to move past its previous PC-centric strategy to become a more diverse company. But Intel’s evolution—whether it’s ultimately successful or not—is about much more than diversification. It’s about becoming a smaller player in a much bigger market. And, in doing so, making far more profits and revenues than were possible when all it really focused on were PCs.

If this sounds familiar, you’ve been paying attention: Microsoft is well on its way to making a similar transformation, in its case away from Windows. And the arguments for doing so were—still are—exactly the same.

“We talk about not being 90-plus percent market share of $60-plus billion total available market (TAM),” Intel CEO Bob Swan told Venture Beat just ahead of MWC Barcelona. “We are talking about being more like a 25 percent market share of a TAM that’s $300 billion. Again, the expanded TAM is a function of more products, more technologies in more places. We’re looking at a $300 billion TAM. What that means for us is the prospects for growth are fairly significant, because the opportunities in front of us are relatively big, by bringing our core competencies, the things we’ve always done, into a much broader footprint.”

So let’s break that down.

What Mr. Swan is saying is that, had Intel simply ridden the PC into the sunset, the potential market for which it could supply microprocessors and other hardware components was about $60 billion. We know from recent history that the PC market peaked in 2011 at just north of 365 million units. And that the PC market has since contracted by about 30 percent, with sales hitting just 259 million units in 2018. Annual PC sales have now fallen for 7 straight years. (Though there were 1-2 quarters of tiny growth last year, too, depending on which analyst firm you ask.)

Instead, Intel has diversified, and it is making pushes into markets like datacenters, automobiles, industrial, retail, and consumer electronics. It is supplying components for Apple iPhones, albeit ones that are, for now, technically inferior to those made by rivals like Qualcomm. In mobile and many other new (for Intel) markets, Intel is not the market or technology leader. It is a newcomer.

But the potential is huge: Swan is saying that the potential of this combined market is 5 times greater than that of the PC, at $300 billion. So the math is simple: Intel’s 90 percent share of the PC market is worth about $54 billion. But Intel’s (estimated) 25 percent share of this combined market is worth about $75 billion. So while Intel will be a (much) smaller player in each market it is now addressing, it has the potential to emerge on the other side as a (much) bigger company. $75 billion is almost 30 percent bigger than $54 billion.

I’ve written and spoken a lot about Microsoft’s changes, but they of course mirror what Intel is doing. (OK, Intel’s changes mirror what Microsoft is doing.) Turning its back on its “Windows-only” and “Windows-first” strategies of the past, the software giant has in more recent years pushed a more diversified set of products and services that are largely cloud-based and aimed at businesses, which are accustomed to the regular payment cadence of subscription services. Microsoft has changed the branding here a few times, from “cloud first, mobile first” to “intelligent cloud, intelligent edge,” but the real focus is that first bit. The cloud, across a stunning range of Azure services to Microsoft 365 and Office 365, Dynamics, Bing, AI, and more.

Microsoft’s strategy is the same as Intel’s: It will no longer dominate a single market but will instead be one of many players in many more heterogeneous markets. (This change also partially explains Microsoft’s sometimes crazy embrace of open source technologies and ideals, though it’s unclear how a similar approach could be employed by hardware makers like Intel.) The expected result is the same: Microsoft will emerge as a much bigger company should it successfully make this transition.

To be clear, there are no guarantees. Looking at Microsoft today, we see that the business unit most closely associated with its old products, called More Personal Computing, was again its largest single business, with $13 billion in revenues in the most recent quarter. Microsoft talks a lot about the cloud, and it is certainly positioning itself for this future. But its legacy Windows platform is still much bigger than Azure, which is only part of its $9.4 billion Intelligent Cloud business.

Over at Intel, we see a similar story: Intel’s “PC-centric business,” called CCG, had revenues of $9.8 billion in the most recent quarter, making it by far Intel’s largest business. (The datacenter-centric DCG hit $6.1 billion in revenues.) That’s 52 percent of Intel’s overall revenues. Over half.

So there are two big differences between Microsoft and Intel. First, Intel is less far along in its transition than is Microsoft. And second, frankly, is how ill-equipped Intel seems to be for this new world, given the immaturity of its non-PC (and non-datacenter) products. Microsoft appears to be making a far more effortless transition. Yes, part of that effort—ceding consumer technologies at an alarmingly consistent rate—is troubling to enthusiasts. But it’s the right thing for Microsoft to do.

So, we’ll see how well Intel plots its own future. In the good news department, it has Microsoft’s playbook to follow. But in the bad news department, it has aggressive and innovative competitors like Qualcomm to deal with. An its ability to do that will largely determine its future successes, if any.