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Intel gives up on world's biggest chip market. Why?

Curtains for the 'tele-phone'

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Comment Intel's name looks forever to be associated with the PC, now that it's ended a nine year dalliance with the phone business. The firesale of its 1,400 strong XScale processor division, and the write down of its cellular investments, means that Intel has passed up the chance to play in the largest volume chip market of them all. There are 2bn mobile phones in the world, and in many emerging markets the phone is the only computing device likely to achieve ubiquity.

So this business decision, apparently made in response to short-term pressure from AMD, is going to have very long term consequences for INTC shareholders.

Intel's failure wasn't for a lack of talent or investment - or even luck - over the years. Intel threw $1.6bn on a DSP company in 1999, and followed up with a host of smaller investments. And luck blessed Intel on several occasions. When DEC's StrongARM processor fell into Intel's hands in the fall of 1997, it was as a result of a legal settlement, and an unsought and unexpected prize. Pundits at the time thought that Intel had been handed the keys to the kingdom. But billions of dollars later, Intel could only claim two significant design wins from lower tier phone OEMs RIM and Palm. Texas Instruments, by contrast, will cash $14bn in revenue from phone chip sales this year.

So how did Intel fail to capitalize? In a nutshell, it failed to live up to its name. Intel may stand for 'INTegrated ELectronics', but it failed to integrate the electronics that mattered when it mattered.

A series of poor management decisions ensured that StrongARM was well positioned for a market that was on the decline, and rarely competitive in a market that boomed. Early on, Intel decided against integrating dedicated digital signal processing into the StrongARM chip, later renamed XScale. While this decision was justifiable for fixed embedded markets and for PDAs, it put the chip at a huge disadvantage for lower cost devices that needed voice capabilities. In response, Intel copied the PC strategy of adding new floating point instructions, introducing MMX for Xscale. Since phone manufacturers preferred cheaper custom chips for devices that needed a multimedia flip, this was a wasted investment.

And while Intel's phone rivals raced to produce an integrated 'phone on a chip' - a single chip or single core platform capable of running a signalling stack - Intel ignored the trend. At 3GSM this February, Motorola unveiled a single chip 3G phone chip, the MXC300, that cut manufacturers costs by 50 per cent. It roasts Xscale for performance.

Little wonder, then, that StrongARM architect Rich Witek and former director of StrongARM development Greg Hoeppner had decamped to Cadence by early 1999. They could see the writing on the wall.

And in recent years Intel wooed the cellular incumbents in a most curious fashion: it declared war on them.

Intel began to lobby hard for spectrum deregulation, and invested heavily in promoting WiMAX. It told anyone who cared to listen that in looking for successors to 3G, the current incumbents were backing the wrong horse. They forgot that the biggest, and possibly only purchasers of WiMAX equipment are the current incumbents. With voice revenues trending to zero, only a fool would launch a new, incompatible WiMAX network at the public.

So it became a regular feature of recent Intel Developer Forum events that the engineers would, at some point later in the week, wheel out a wireless wonder we satirized as "the Tele-Phone".

Alert readers may point out that Intel's history of integration is littered with failures. Timna, the first "system on a chip", failed to quack. But in the case of mobile chips, it's only fair to say that poor management decisions meant they never had a chance to prove what they could do.

The firesale continues. Intel is to announce the divestment of its flash memory business too, as soon as it can. ®

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