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One reason must have been the declining demand for PCs.
Another reason could be the fact that, at $14 billion, Intel’s cash position is not all that much for a $50 billion a year revenue company enjoying 60% + margins.
Contrast Apple’s cash of $120 billion, Cisco’s of $52 billion and Microsoft’s of $73 billion.
Moreover Intel has debt of $7 billion, so its net cash is barely enough to build a brace of fabs.
But there could be a more fundamental reason why Buffett shied away from Intel. The Sage likes businesses which create fundamental value – like railways and IBM.
Railways are part of the arteries which keep American industry running. IBM does research at the edge of scientific knowledge. Both of these translate into real value.
But where would Intel be without its legal protection? In the 1980s and 90s it sued much of the rest of the industry to establish a quasi-monopoly in x86 processors.
A legally protected monopoly is always vulnerable to someone finding a way around that legal protection.
Where would Intel have been these last 30 years had it not been for Microsoft protecting Intel by allowing its software to run only on x86 processors?
Both these protective cloaks are about to be removed from Intel. When they are, Intel will have to show it creates fundamental value.
Intel no doubt thinks its fundamental value is its lead in process. But Intel is not ahead in process where the battle is being fought – mobile SOCs.
An unprotected Intel will have to show it delivers fundamental value.
Can it?
Thanks, Rupert, you’re absolutely right and I agree with all that you say except for one point – I’m not disappointed that Intel is set for decline. IMHO Intel has too large a share of the revenues and profits of the semiconductor industry and if those revenues and profits were spread more widely, I believe more innovation would occurr.
I don’t think it’s quite fair to say that Microsoft only allowed its software to run on x85. It’s made various forays into other architectures, with NT running on MIPS and Alpha and the mobile/embedded stuff being ARM from the outset. It’s also been there for the Mac on 68K and Power, and transitioned from x86 to Power in the XBox.
It’s more accurate to say that the Wintel monopoly was somewhat outside the control of either company – both trying from time to time to break free of it, as they’ve long been aware of its inherent vulnerability to disruption and limited life and the danger of not developing alternative revenue streams of equivalent potency. Neither company has managed, and both are now in stagnation.
Which is not to say that Intel isn’t in as much danger as you say – it is. With the rise of the cloud companies DIY approach to server design and acquisition, alongside the death of the desktop and x86’s retreat from low-power, the revenue stack for x86 is delaminating fast and its very hard to see anything other than accelerating decline for Intel.
I really wish that wasn’t so. The company has tried hard to find new markets through fundamental new developments – silicon optics, RF, MEMS, displays, new processor and networking architectures – but none of them has stuc
If you’re saying that there’s been over-investment in server farms for Cloud-based services and lower than expected demand for Cloud-based services, Bryanroo, then I’m intrigued – and gratified. It’s always seemed to me that the attractions of local storage are compelling compared to the alternative of relying on flaky links.
Massive server farms for Cloud Computing provided most of Intel’s recent
growth.
That build-out has peaked, and the Cloud is making tablets and smart
phones more effective that PCs. A double whammy for x86 demand!
I don’t think Mike can quibble at this one, Bitter, surely my points are self-evident to everyone.
And soon comes the obligatory taunt by Mike and thus the quibble begins.
🙂