POWER to the People: IBM is Too Little, Too Late

“On August 6, Google, IBM, Mellanox, NVIDIA and Tyan today announced plans to form the OpenPOWER Consortium – an open development alliance based on IBM’s POWER microprocessor architecture. The Consortium intends to build advanced server, networking, storage and GPU-acceleration technology aimed at delivering more choice, control and flexibility to developers of next-generation, hyperscale and cloud data centers.”

IBM Hardware Is Not Carrying Its Weight
As the last computer manufacturer with its own silicon fab, IBM has a financial dilemma. The cost of silicon fab investments is increasing. Hardware revenues are declining.  There are fewer new Z-series mainframes and POWER-based midrange computers on which to allocate hardware R&D, product development, fab capex, and other amortized costs. POWER revenues were down 25% in the latest quarter. Bloomberg reports furloughs of the hardware staff this month in an effort to cut costs.

The cloud-based future data center is full of Intel Xeon-based servers as practiced by Google, Amazon, Facebook et al. But margins on Intel-architecture servers — IBM’s instantiation is the X Series — are eroding. Widely believed rumors earlier this year had IBM selling off its X Series business to Lenovo, like IBM spun off its PC business in 2005.

Clearly, the IBM hardware business is the subject of much ongoing discussion in Armonk, NY.

The OpenPOWER Consortium is a Strategic Mistake
Our view view is that IBM has made a strategic mistake with this announcement by admitting proprietary defeat and opening POWER up to an open-source consortium. The signal IBM is sending is that it is no longer totally committed to the long-term future of its mainframe and POWER hardware. The sensitive ears of IBM’s global data center customers will pick this message up and, over time, accelerate plans to migrate off of IBM hardware and software.

Proprietary hardware and software business success depends a great deal on customer trust — more than is commonly assumed. Customers want a long term future planning horizon in order to continue investing in IBM, which is not the lowest-cost solution. When trust is broken, a hardware business can crash precipitously. One such example is Prime Computer, a 1980s Massachusetts darling that was acquired, dropped plans for future processors, and watched its installed base decline at a fifty-percent per annum rate. On the other hand, H-P keeps Digital Equipment and Tandem applications going to this day.

By throwing doubt on its future hardware business horizon, IBM risks its entire business model. Yes, that is a far-fetched statement but worth considering: the IBM services and software business is built around supporting, first and foremost, IBM hardware. Lose proprietary hardware customers, and services and high-margin software business will decline.

So, we think IBM is risking a lot by stirring up its customer base in return for a few million dollars in POWER consortium licensing revenue.

What About Google?
To see how this deal could turn even worse for IBM, let’s look at the motives of the headline consortium member, Google.

First, IBM just gave Google the “Amdahl coffee mug”. In the mainframe hay days of the 1970s, it was a common sales tactic for Amdahl, a mainframe clone company in fierce competition with IBM, to leave a coffee mug for the CIO. Properly placed on a desk, it sent the message to the IBM sales team to drop prices because there was competition for the order. A POWER mug — backed by open POWER servers — will send a pricing signal to Intel, which sells thousands of Xeon chips directly to Google. That action won’t budge the needle much today.

POWER servers are most likely to appear in Open Compute form, as blades in an open-hardware rack-tray. These are the cost-reduced server architectures we see sucking the margin out of the entire server industry. Gas on the fire of that trend.

And we don’t see Google needing to build its own Tier-3 backend database servers, a common role for POWER servers. However, Google customizing POWER chips with nVidia GPU technology for some distant product is believable. For example, we’re puzzling how Google will reduce the $85,000 technology cost of its driverless automobile to mass-market cost levels, and the consortium could become part of that solution.

Open POWER Software Too?
IBM is emphatically not throwing POWER operating system (i.e., AIX Unix and OS/400) and systems software into the open consortium. That would give away the IBM family jewels. So, the open-source hardware folks will quickly turn to the Linux on POWER OS’s. Given a choice, the buyers will turn to open-source — that is, free or lower cost — versions of IBM software equivalents for system software. We see little software-revenue upside to IBM’s POWER consortium move. Nor services either.

Fortunately, IBM did not suggest that POWER licensing would extend to the fast-growing mobile world of tablets and smartphones because that would be a bridge way too far. IBM may staunch some of the embedded POWER chip business lost to ARM’s customers and Intel in recent years through customizations by licensing designs ala ARM Holdings.

Thoughts and Observations
In conclusion, we see nothing good happening to IBM’s bottom line as a result of the OpenPOWER Consortium announcement. And if it wasn’t about the bottom line, why risk long-term customer trust in IBM’s long-term hardware platform commitments? The revenue from POWER licensing will not come close to compensating for the weakness that IBM displays with this consortium strategy.

I ask this without drama or bombast: can we now see the dim horizon where IBM is no longer a major player in the computer hardware business? That’s a huge question which until now has never been asked nor needed to be asked. Moreover, no IBM hardware products would mean no IBM fab is needed.

The real implications are about IBM’s declining semiconductor business. POWER (including embedded POWER) is a volume product for IBM Microelectronics, along with current-generation video game chips. The video game business dries up by year end as Sony and Microsoft introduce the next generation consoles, sans IBM content. POWER licensing through the OpenPOWER Consortium might generate some fab business for the East Fishkill, NY IBM fab, but that business could also go to Global Foundries (GloFo) or Taiwan Semi (TMSC). Where’s the chip volume going to come from?

IBM will not be able to keep profitably investing in cutting-edge semiconductor fabs if it does not have the fab volume needed to amortize costs. Simple economics of scale. But note that IBM fab technology has been of enormous help to GloFo and TSMC in getting to recent semiconductor technology nodes. Absent IBM’s help, this progress would be delayed.

Any move by IBM to cut expenses by slowing fab technology investments will have a cascading negative impact on global merchant semiconductor fab innovation, hurting, for example, the ARM chip ecosystem. Is the canary still singing in the IBM semiconductor fab?

Your comments and feedback are invited.

Follow @PeterSKastner on Twitter

IBM POWER Linux Server

Apple’s Q2-2013: Q4 Anticipation

I’m on the road but wanted to update you on Apple’s second quarter.  Revenue was flat and profits were down compared to last year, while iPhone sales were up, and iPad and Mac sales were down. I expect the current third quarter to be constrained by anticipation of expected product announcements in September. Then, product supply issues will be unable to fully meet Q4 holiday demand for iPhone and iPad.

It sure looks like Apple has managed to compress a year’s worth of  opportunities into three or four months. Think how much smoother things might be if product came forth across the entire twelve months of the year.

The text below was supplied by Apple PR. While I cannot vouch for its accuracy, I have no reason at all to dispute it. It’s a useful condensation of the numbers.

This afternoon Apple announced third quarter results, including record June quarter iPhone sales and our highest ever Education revenue. You can find our earnings press release here and a replay of the call with Tim Cook and Peter Oppenheimer is available here. 

Overall:
– Apple reported quarterly revenue of $35.3 billion and net profit of $6.9 billion, compared to $35 billion and $8.8 billion, respectively, a year ago

– Gross margin was 36.9%, compared with 42.8% in the year-ago quarter

– International sales accounted for 57% of total quarterly revenue

– Apple generated $7.8 billion in cash and has returned $18.8 billion in cash to shareholders through dividends and share repurchases

iPhone:
– Apple sold 31.2 million iPhones, up from 26 million in the year-ago quarter

– iPhone leads in customer satisfaction and loyalty, according to numerous third-party research firms, including J.D. Power & Associates, ChangeWave and Kantar

– Apple reduced iPhone inventory by 600,000 units in the quarter

– iPhone remains strong in the enterprise, and has captured 62.5% of the US commercial market, according to IDC

iPad:
– Apple sold 14.6 million iPads in the quarter, compared with 17 million in the year-ago quarter

– iPad faced a tough June comparison, as the first iPad with a Retina display was launched in the year-ago quarter and we ramped up inventory

– iPad channel inventory was reduced by 700,000 units, making sell-through down just 3% year-over-year

– iPad usage share remains incredibly high, and grew to 84.3% last month, according to Chitika

Mac:

– Apple sold 3.8 million Macs, down from 4 million in the year-ago quarter

– The updated MacBook Air line was launched at WWDC in June, making it available for just three weeks of the quarter.

– The Mac was though down 7% but again outperformed the market, which contracted 11%, according to IDC

– We look forward to the launch OS X Mavericks this fall and of the all new Mac Pro later this year

Music/Services:

– iTunes, software and services together generated $4 billion in quarterly revenue

– We now have more than 320 million iCloud accounts and 240 million Game Center accounts

– There are more than 900,000 apps in the App Store, with more than 375,000 designed specifically for iPad

– Customers have downloaded more than 50 billion apps

– Apple has paid more than $11 billion to developers, half of which was earned in the last four quarters

Education:

– Our education division experienced its highest ever quarterly revenue

– 1.1 million iPads were sold in education, and the Mac experienced strong sales as well

– Maine’s statewide education technology program saw 94% of the state’s elementary and high schools choosing Apple products

– The first phase of Los Angeles Unified School District’s plan to provide 660,000 students with a tablet was approved, resulting in an initial $30 million iPad sale

Retail:

– Apple retail stores generated $4.1 billion in revenue, about equal to a year ago

– iPhone saw strong growth in sales of our own retail stores

– MacBook Air had its most successful Retail launch to date

– We opened six new stores across five countries and now have 408 stores, 156 outside the US

Apple iPads

Peak Technology or Technology Peak?

The theory of peak oil — the point at which the Earth’s oil supply begins to dwindle — was a hot and debatable topic last decade. There are lots of signs that we are at a technology demand peak. Is this permanent, or how will we get past this peak?

The last-decade argument that oil production had permanently peaked proved to be laughably incorrect. Hydraulic fracturing  (“fracking”) technology developed in the United States changed the slope of the oil production curve upwards. This analyst has no intention becoming a laughing stock by suggesting that digital technology innovation has peaked. Far from it. However, few things in nature are a straight line; it certainly appears that digital technology adoption — demand — has slowed. We are in a trough and can’t foresee the other side.

One good place to look for demand forecasts is the stock market.

Smart Phones and Tablets
Last month, both gadget profit-leaders Samsung and Apple both took hits based on slower growth forecasts. “Pretty much everyone who can afford a smartphone or tablet has one, so where does the profit growth come from?” was the story line. Good question.

This month, AT&T and T-Mobile announced they would lease customers smartphones instead of selling them outright with a carrier discount. The phones and tablets coming off lease will be re-sold into the burgeoning used gadget market. It’s now too easy to get new-enough gadget technology in the used market. After all, your last-year’s hardware can still run this year’s free, new software upgrade.

On the surface, it appears that the global market for $600 smartphones and tablets is at or close to saturation — a peak.

Desktop and Notebook PCs
The stock market is not treating traditional technology makers very well. H-P is coming back from a near-death experience. Its stock is half what it was two years ago. Dell wants to go private so it can restructure and deal with market forces that are crushing margins and profits. Even staid and predictable IBM has lost its mojo over the past five quarters. Microsoft missed.

These technology makers are dealing with PCs, the data center, and services. They are not major players in the smartphone/gadget market. Their focus is on doing what they used to do more efficiently. That strategy is not working.

The desktop and notebook PC markets are almost all replacement units in developed countries. Macro-economics has dramatically slowed emerging market growth in formerly hot places like Brazil, Russia, India, and China (BRIC). The new customers are being added more slowly and at higher costs, and existing customers have increasingly voted to not upgrade as frequently. My 2008 Apple MacBook Air, cutting edge and quite expensive at the time, is still adequate for road trips. My Sandy Bridge Generation-1 Ultrabook has adequate battery life. There’s no compelling reason, most buyers tell us, to accelerate the PC replacement cycle.

Well, one temporary accelerator is the support demise next year for Windows XP. With auditors and consultants screaming about liability issues, non-profits and government are rolling in new PCs to replace their ten-year old kit. Thank goodness. But seriously, ten-year old PCs have been getting the job done, as defined by user management.

Note also that a new PC likely means a user-training upgrade to Windows 8. Both consumers and businesses are avoiding this upgrade more or less like the plague. There is no swell of press optimism that Windows 8.1 this fall will be the trick. PC replacement is a pain already, so few want to jump on an OS generation change as well.

Data Center
The data center market shows some points of light. Public cloud data centers by the big boys like Apple, Google, Facebook, and Amazon are growing like gangbusters. High Performance Computing, where ever more complex models consume as many teraflops as one can afford to throw at the problem. Recent press reports suggest that “national security” is a growing technology consumer. [understatement]

However, enterprise data centers, driven by cautious corporate management, are growing more slowly than five years ago; this market outsizes the points of light. Moreover, the latest generation of server technology really does support more users and apps than the gear being replaced. With headcount down and fewer new enterprise apps, fewer racks are now getting the computing workload done. (Storage, of course, is growing logarithmically). We also expect a growing trend towards “open computing” servers, a trend that will suck hardware margin and services revenue from the big server-technology makers.

Navigating From the Trough
So, mobile gadgets, traditional PCs, and the data center — the three legs of the digital technology stool — are all growing more slowly than in the recent past. This is the “technology demand peak” as we see it. We are presently past the peak and into the trough.

How deep is the trough and how long will it last? LOL. If we knew that, we could comfortably retire! Really, there are roughly a couple of trillion dollars in market cap at stake here. If the digital tech market growth remains anemic beyond another twelve months, then there will be too many tech players and too few chairs when the music stops. Any market observer can see that.

Our own view is that it will take a number of technology innovations that will propel replacement demand and drive new markets. The solution is new tech, not better-faster-smaller old tech. Where’s the digital equivalent of fracking? (Actually, fracking would not be possible without a lot of newly invented, computer-based technology.)

First, the global macro-economic slowdown is likely to resolve itself positively, perhaps soon. We don’t buy the global depression arguments. There are billions of potential middle-class new computer consumers and the data center backend to support them.

Next, mobile gadgets and PCs are on the verge of exciting new user interfaces. Things like holographic 3D displays — you are in the picture, and keyboards projected on any flat surface. Conference-room projection capabilities in every smartphone. New users interfaces, shared with PCs and notebooks, that are based on perceptual computing, the (wo)man-machine interface that recognizes voice, gestures, and eye movement, for starters.

Big data and the cloud are data-center conversation pieces. But these technologies are really toddlers, at best. Data-sifting technologies like the grandson of Hadoop will enable more real-time enterprise intelligence and wisdom. HPC has limits only of money available to invest. Traditional data centers will re-plumb with faster I/O, distributed computing, and the scale-up and scale-down capacity of an electric utility — while needing less from the electrical utility.

We don’t have all the answers, but are convinced it will take an industry kick in the pants to get us towards the next peak. More of the same is not a recipe for a solution. We are in a temporary downturn, not just past peak technology.

Your thoughts and comments are welcome.

Photo Credit: Eugene Richards

Two-In-One Tablet/Notebooks: Mirage or Miracle?

Intel’s sales and marketing senior executive Tom Kilroy said at Computex last week “The two-in-one concept is really going to be the new wave”, citing computers such as the Lenovo Yoga, which can be used as both a laptop, a tablet and in ‘tent’ mode with a viewing screen that stands up on its own, he said. “The days of carrying around a smartphone, a tablet, and a notebook are numbered – the discrete tablet as we know it will go by the wayside and the 2-in-1 will be the future. If you’re doing content creation it just doesn’t happen on the phone.”

We’re Heading in the Right Direction
I cannot agree more that the endpoint for all the phone, tablet, laptop/notebook convergence talk is fewer devices for most people. For one reason, cost alone prohibits many from affording three devices at a roughly $600 unsubsidized cost per device. The phone is most likely to stand alone because it is the most pocket-portable, and can do it all albeit in a tiny form factor. That leaves the battle between the tablet and laptop as the device most likely to morph dramatically this decade.

Many will settle on a converged laptop-tablet (laptab) that combines the media consumption strengths of the tablet with the data and media production strengths of the laptop/notebook. Such a laptab could do the jobs of both a laptop and a tablet with few if any compromises. Done right, the laptab will be the converged non-phone device.

Intel’s Haswell and Baytrail announcements on June 3rd set the stage for that company to rapidly become a much bigger player in the smartphone and laptop business, as well as setting the stage for Ultrabook laptops with convertible features. What’s changed with this latest generation of technology is much improved performance-per-watt, idle power, and battery life.

The mainstream laptop is now in the same ballpark as tablets with keyboards in baseline mobility and weight. Convertible laptops sans keyboards give up little to dedicated tablets in hardware. Tablets and laptops now both have adequate screen resolution, processor speed, memory and storage, and battery life for media consumption — the tablet’s tour de force.

However, while the industry is now headed in the direction of laptab convergence, I don’t think we are yet on course. As the old New England adage goes, “If you don’t know where you’re going, any road will get you there.”

Let’s look more deeply at what a converged two-in-one should look like. We’d hate for the promise of convergence to be a mirage.

A Two-in-One Should Be Just That
Our qualitative market research shows consumers really do want one mobile device that can do the jobs now performed separately by laptops and tablets. As usual, the devil is in the details.

To the users in our research panels, converged really does mean “coming together” in hardware and software including apps. That’s not the public industry directional focus we’ve seen.

On laptops, users want to “run tablet apps on a productivity OS (like Windows or OS X). On smartphones and tablets, users want to “run productivity apps I am familiar with, and have access to my home and work data.” Queried further, users tell us they want a merged hardware feature-set  combining a tablet and laptop together with the ability to run their tablet apps on the laptop. (You gotta love non-technology users for wanting technology miracles. It’s what drives innovation.)

A converged laptab hardware set would include:

• Processor, memory, storage, touch screen
• All-day (and probably into the night) battery life
• Keyboard, preferably removable for weight reasons
• Tablet sensors: GPS, accelerometer, 1080p video/still camera
• Radios: Bluetooth, WiFi, optional 3G/LTE cellular. NFC when retailers enables the NFC eCommerce market.

The heavy lift from these pesky consumers is in the software stack. They want to run tablet apps (e.g., Angry Birds) on a full operating system. For example, iOS apps on an OS X MacBook.

Importantly, they do not want to buy a second copy of an app (e.g., $4.99 Angry Birds for OS X) on a full operating system. “One app with one set of data” is what we heard, along with complaints about the intricacies of syncing. Now, we suggested to Apple execs five years ago this summer that running iOS apps on OS X was a good idea. They replied, “Yeah, we’ve heard that.” But not done anything about it.

So, consider consumers with jobs who need to stay compatible with applications and files they use at work. Think Microsoft Office. These folks can’t give up the laptop and its office-productivity OS for a consumption-oriented tablet in an either-or decision. Let’s call this the business laptab market.

Conversely, tablets are go-to devices for video watchers, Internet surfers, email and readers but few book writers or budget spreadsheet accountants. It’s the consume(r) market.

How the tech industry responds to the above specs for the two divergent markets will dictate the course and duration of converged laptab demand.

There are two positive signs we’ve noticed recently, both involving Intel. First, the company acquired ST-Ericsson’s global navigation satellite system (GNSS) business. That will bring GPS capabilities to Intel’s communications chip business, and hence to Intel mobile products like tablets and laptops. Second, the Silvermont architecture that includes the Baytrail tablet chip supports virtualization, so hypothetically Android could run along side Windows or iOS along side OS X. Just a  small matter of programming and licensing.

On the negative side, a number of products have been announced with dual-boot capabilities, especially Android and Windows. This plays to the “laptop converts to tablet” form of convertibles. However, our research says dual-boot is not the destination.

To watch laptab convergence play out, keep an eye on the three OS players: Microsoft Windows, Apple’s iOS and OS X, and Google. We view Google as a wild card because it could rather easily merge Chrome OS and Android with Google apps (but has said that won’t happen over the next two years.) The hardware industry really cannot deliver the converged laptab described above without the active support of the OS players.

Laptab users may want to think through their long-term options. Browser-based apps, especially those using HTML5 and the cloud, are quite interchangeable. The trend is towards cross-OS applications. Apple’s iWork office apps will soon run on iOS, OS X, and Windows. Google Docs and Microsoft Office 365 are available in the cloud. Microsoft just delivered Office for iPhone.

Summary Observations
The direction of laptab convergence we’ve seen to date is headed in the right direction, but the finish line is not in sight.

Real consumers with experience in tablets and laptops see the need to bring all the sensor and media hardware in tablets to laptops; convertible laptops with removable keyboards do not go far enough into the desired experience to replace and substitute for tablets.

The convergence miracle is a combined tablet and notebook OS software and user apps. The hardware to do this is now close at hand. But the willingness of the industry to push the software, licensing, and marketing investment is not apparent.

Thus, widespread laptab substitution for tablets and laptops is not in the foreseeable future. The market, especially the business laptab market, will remain additive.

Follow @peterskastner on Twitter

Lenovo Ideapad Yoga convertible laptop

Pulse Check: How Intel is Scaling to Meet the Decade’s Opportunities

Eighteen months ago, Intel announced it would address the world’s rapidly growing computing continuum by investing in variations on the Intel Architecture (IA). It was met with a ho-hum. Now, many product families are beginning to emerge from the development labs and head towards production. All with IA DNA, these chip families are designed to be highly competitive in literally dozens of new businesses for Intel, produced in high volumes, and delivering genuine value to customers and end users.

Intel is the only company with an architecture, cash flow, fabs, and R&D capable of scaling its computing engines up and down to meet the decade’s big market opportunities. What is Intel doing and how can they pull this off?

The 2010’s Computing Continuum
Today’s computing is a continuum that ranges from smartphones to mission-critical datacenter machines, and from desktops to automobiles.  These devices represent a total addressable market (TAM) approaching a billion processors a year, and will explode to more than two billion by the end of the decade.  Of that, traditional desktop microprocessors are about 175 million chips this year, and notebooks, 225 million.

For more than four decades, solving all the world’s computing opportunities required multiple computer architectures, operating systems, and applications. That is hardly efficient for the world’s economy, but putting an IBM mainframe into a cell phone wasn’t practical. So we made due with multiple architectures and inefficiencies.

In the 1990’s, I advised early adopters NCR and Sequent in their plans for Intel 486-based servers. Those were desktop PC chips harnessed into datacenter server roles. Over twenty years, Intel learned from its customers to create and improve the Xeon server family of chips, and has achieved a dominant role in datacenter servers.

Now, Intel Corporation is methodically using its world-class silicon design and fabrication capabilities to scale its industry-standard processors down to fit smartphones and embedded applications, and up into high-performance computing applications, as two examples. Scaling in other directions is still in the labs and under wraps.

The Intel Architecture (IA) Continuum
IA is Intel’s architecture and an instruction set that is common (with feature differentiation) in the Atom, Core, and Xeon microprocessors already used in the consumer electronics, desktop and notebook, and server markets, respectively.  These microprocessors are able to run a common stack of software such as Java, Linux or Microsoft Windows.  IA also represents the hardware foundation for hundreds of billions of dollars in software application investments by enterprise and software application package developers that remain valuable assets as long as hardware platforms can run it — and backwards compatibility in IA has protected those software investments.

To meet the widely varying requirements of this decade’s computing continuum, Intel is using the DNA of IA to create application-specific variants of its microprocessors.  Think of this as silicon gene-splicing.  Each variant has its own micro-architecture that is suited for its class of computing requirements (e.g., Sandy Bridge for 2011 desktops and notebooks). These genetically-related processors will extend Intel into new markets, and include instruction-set compatible microprocessors:

• Embedded processors and electronics known as “systems on a chip” (SOCs) with an Atom core and customized circuitry for controlling machines, display signage, automobiles, and industrial products;
• Atom, the general-purpose computer heart of consumer electronics mobile devices, tablets, and soon smartphones;
• Core i3, i5, and i7 processors for business and consumer desktops and notebooks, with increasing numbers of variants for form-factor, low power, and geography;
• Xeon processors for workstations and servers, with multi-processors capable advances well into the mainframe-class, mission-critical computing segment;
• Xeon datacenter infrastructure processor variants (e.g., storage systems, and with communications management a logical follow-on);

A Pause to Bring You Up To Date
Please do not be miffed: all of the above was published in February, 2011, more than two years ago. We included it here because it sets the stage for reviewing where Intel stands in delivering on its long-term strategy and plans of the IA computing continuum, and to remind readers that Intel’s strategy is hiding in plain sight for going on five years.

In that piece two years ago, we concluded that IA fits the market requirements of the vast majority of the decade’s computing work requirements, and that Intel is singularly capable of creating the products to fill the expanding needs of the computing market (e.g., many core).

With the launch of the 4th Generation Core 22nm microprocessors (code-name Haswell) this week and the announcement of the code-name Baytrail 22nm Atom systems on a chip (SoCs), it’s an appropriate time to take the pulse on Intel’s long-term stated direction and the products that map to the strategy.

Systems on a Chip (SoCs)
The Haswell/Baytrail launch would be a lot less impressive if Intel had not mastered the SoC.

The benefits of an SoC compared to the traditional multi-chip approach Intel has used up until now are: fewer components, less board space, greater integration, lower power consumption, lower production and assembly costs, and better performance. Phew! Intel could not build a competitive smartphone until it could put all of the logic for a computer onto one chip.

This week’s announcements include SoCs for low-voltage notebooks, tablets, and smartphones. The data center Atom SoCs, code-name Avoton, are expected later this year.

For the first time, Intel’s mainstream PC, data center, and mobile businesses include highly competitive SoCs.

SoCs are all about integration. The announcement last month at Intel’s annual investor meeting that “integration to innovation” was an additional strategy vector for the company hints at using many more variations of SoCs to meet Intel’s market opportunities with highly targeted SoC-based variants of Atom, Core, and Xeon.

Baytrail, The Forthcoming Atom Hero
With the SoCs for Baytrail in tablets and Merrifield in smartphones, Intel can for the first time seriously compete for mobile marketshare against ARM competitors on performance-per-watt and performance. These devices are likely to run the Windows 8, Android, and Chrome operating systems. They will be sold to carriers globally. There will be variants for local markets (i.e., China and Africa).

The smartphone and tablet markets combined exceed the PC market. By delivering competitive chips that run thousands of legacy apps, Intel has finally caught up on the technology front of the mobile business.

Along with almost the entire IT industry, Intel missed the opportunity that became the Apple iPhone. Early Atom processors were not SoCs, had poor battery life, and were relatively expensive. That’s a deep hole to climb out of. But Intel has done just that. There are a lot fewer naysayers than two years ago. The pendulum is now swinging Intel’s way on Atom. 2014 will be the year Intel starts garnering serious market share in mobile devices.

4th Generation Core for Mainstream Notebooks and PCs
Haswell is a new architecture implemented in new SoCs for long-battery-life notebooks, and with traditional chipsets for mainstream notebooks and desktops. The architecture moves the bar markedly higher in graphics performance, power management, and floating point (e.g., scientific) computations.

We are rethinking our computing model as a result of Haswell notebooks and PCs. Unless you are an intense gamer or workstation-class content producer, we think a notebook-technology device is the best solution.

Compared to four-year old notebooks in Intel’s own tests, Haswell era notebooks are: half the weight, half the height, get work done 1.8x faster, convert videos 23x faster, play popular games 26x faster, wake up and go in a few seconds, and with 3x battery life for HD movie playing. Why be tethered to a desktop?

Black, breadbox-size desktops are giving way to all-in-one (AIO) designs like the Apple iMac used to write this blog. That iMac has been running for two years at 100% CPU utilization with no problems. (It does medical research in the background folding proteins). New PC designs use notebook-like components to fit behind the screen. You’ll see AIOs this fall that lie flat as large tablets or go vertical with a rear kick-stand. With touch screen, wireless Internet and Bluetooth peripherals, these new AIOs are easily transportable around the house. That’s the way we see the mainstream desktop PC evolving.

And PCs need to evolve quickly. Sales are down almost 10% this year. One reason is global macro-economic conditions. But everybody knows the PC replacement cycle has slowed to a crawl. Intel’s challenge is to spark the PC replacement cycle. Haswell PCs and notebooks, as noted above, deliver a far superior experience to users than they are putting up with in their old, obsolescent devices.

Xeon processors for workstations, servers, storage, and communications
The data center is a very successful story for Intel. The company has steadily gained workloads from traditional (largely legacy Unix) systems; grown share in the big-ticket Top 500 high-performance computing segment; evolved with mega-datacenter customers such as Amazon, Facebook, and Google; and extended Xeon into storage and communications processors inside the datacenter.

The Haswell architecture includes two additions of great benefit to data-center computing. New floating point architecture and instructions should improve scientific and technical computing throughput by up to 60%, a huge gain over the installed server base. Second, transactional memory is a technology that makes it easier for programmers to deliver fine-grain parallelism, and hence to take advantage of multi-cores with multi-threaded programs, including making operating systems and systems software like databases run more efficiently.

In the past year, the company met one data-center threat in GPU-based computing with PHI, a server add-in card that contains dozens of IA cores that run a version of Linux to enable massively parallel processing. PHI competes with GPU-based challengers from AMD and nVidia.

Another challenge, micro-servers, is more a vision than a market today. Nevertheless, Intel created the code-name Avoton Atom SoC for delivery later this year. Avoton will compete against emerging AMD- and ARM-based micro-server designs.

Challenges
1. The most difficult technology challenge that Intel faces this decade remains software, not hardware.  Internally, the growing list of must-deliver software drivers for hardware such as processor-integrated graphics means that the rigid two-year, tick-tock hardware model must also accommodate software delivery schedules.

Externally, Intel’s full-fray assault on the mobile market requires exquisite tact in dealing with the complex relationships with key software/platform merchants: Apple (iOS), Google (Android), and Microsoft (Windows), who are tough competitors.

In the consumer space such as smartphones, Intel’s ability to deliver applications and a winning user experience are limited by the company’s OEM distribution model. More emphasis needs to be placed on the end-user application ecosystem, both quality and quantity. We’re thinking more reference platform than reference hardware.

2. By the end of the decade, silicon fabrication will be under 10 nm, and it is a lot less clear how Moore’s Law will perform in the 2020’s. Nevertheless, we are optimistic about the next 10-12 years.

3. The company missed the coming iPhone and lost out on a lot of market potential. That can’t happen again. The company last month set up an new emerging devices division charged with finding the next best thing around the same time others do.

4. In the past, we’ve believed that mobile devices — tablets and smartphones — were additive to PCs and notebooks, not substitutional. The new generation of Haswell and Baytrail mobile devices, especially when running Microsoft Windows, offer the best of the portable/consumption world together with the performance and application software (i.e., Microsoft Office) to produce content and data. Can Intel optimize the market around this pivot point?

Observations and Conclusions
Our summary observations have not changed in two years, and are reinforced by the Haswell/Baytrail SoCs that are this week’s proof point:

• Intel is taking its proven IA platforms and modifying them to scale competitively as existing markets evolve and as new markets such as smartphones emerge.
• IA scales from handhelds to mission-critical enterprise applications, all able to benefit from a common set of software development tools and protecting the vast majority of the world’s software investments.  Moreover, IA and Intel itself are evolving to specifically meet the needs of a spectrum of computing made personal, the idea that a person will have multiple computing devices that match the time, place and needs of the user.
• Intel is the only company with an architecture, cash flow, fabs, and R&D capable of scaling its computing engines up and down to meet the decade’s big market opportunities.

Looking forward, Intel has fewer and less critical technology challenges than at any point since the iPhone launch in 2007. Instead, the company’s largely engineering-oriented talent must help the world through a complex market-development challenge as we all sort out what devices are best suited for what tasks. We’ve only scratched the surface of convertible tablet/notebook designs. How can Intel help consumers decide what they want and need so the industry can make them profitably? How fast can Intel help the market to make up its mind? Perhaps the “integration to innovation” initiative needs a marketing component.

If the three-year evolving Ultrabook campaign is an example of how Intel can change consumer tastes, then we think industry progress will be slower than optimal. A “win the hearts and minds” campaign is needed, learning from the lessons of the Ultrabook evolution. It will take skillsets in influencing and moving markets in ways Intel will need more of as personal computing changes over the next decade, for example, as perceptual computing morphs the user interface.

Absent a macro-economic melt-down, Intel is highly likely to enjoy the fruits of five years of investments over the coming two-year life of the Haswell architecture. And there’s no pressing need today to focus beyond 2015.

Biography

Peter S. Kastner is an industry analyst with over forty-five years experience in application development, datacenter operations, computer industry marketing, PCs, and market research.  He was a co-founder of industry-watcher Aberdeen Group in 1989.  His firm, Scott-Page LLC, consults with technology companies and technology users.

Twitter: @peterskastner

Haswell Core i7 desktop microprocessor

On the Impact of Paul Otellini’s CEO Years at Intel

Intel’s CEO Paul Otellini is retiring this week. His 40-year career at Intel now ending, it’s a timely opportunity to look at his impact on Intel.

Source: New York Times

Intel As Otellini Took Over

In September 2004 when it was announced that Paul Otellini would take over as CEO, Intel was #46 on the Fortune 100 list, and had ramped production to 1 million Pentium 4′s a week (today over a million processors a day). The year ended with revenues of $34.2 billion. Otellini, who joined Intel with a new MBA in 1974, had 30 years of experience at Intel.

The immediate challenges the company faced fell into four areas: technology, growth, competition, and finance:

Technology: Intel processor architecture had pushed more transistors clocking faster, generating more heat. The solution was to use the benefits of Moore’s Law to put more cores on each chip and run them at controllable — and eventually much reduced — voltages.

Growth: The PC market was 80% desktops and 20% notebooks in 2004 with the North America and Europe markets already mature. Intel had chip-making plants (aka fabs) coming online that were scaled to a continuing 20%-plus volume growth rate. Intel needed new markets.

Competition: AMD was ascendant, and a growing menace.  As Otellini was taking over, a market research firm reported AMD had over 52% market share at U.S. retail, and Intel had fallen to #2. Clearly, Intel needed to win with better products.

Finance: Revenue in 2004 recovered to beat 2000, the Internet bubble peak. Margins were in the low 50% range — good but inadequate to fund both robust growth and high returns to shareholders.

Where Intel Evolved Under Paul Otellini

Addressing these challenges, Otellini changed the Intel culture, setting higher expectations, and moving in many new directions to take the company and the industry forward. Let’s look at major changes at Intel in the past eight years in the four areas: technology, growth, competition, and finance:

Technology

Design for Manufacturing: Intel’s process technology in 2004 was at 90nm. To reliably achieve a new process node and architecture every two years, Intel introduced the Tick-Tock model, where odd years deliver a new architecture and even years deliver a new, smaller process node. The engineering and manufacturing fab teams work together to design microprocessors that can be manufactured in high volume with few defects. Other key accomplishments include High-K Metal Gate transistors at 45nm, 32nm products, 3D tri-gate transistors at 22nm, and a 50% reduction in wafer production time.

Multi-core technology: The multi-core Intel PC was born in 2006 in the Core 2 Duo. Now, Intel uses Intel Architecture (IA) as a technology lever for computing across small and tiny (Atom), average (Core and Xeon), and massive (Phi) workloads. There is a deliberate continuum across computing needs, all supported by a common IA and an industry of IA-compatible software tools and applications.

Performance per Watt: Otellini led Intel’s transformational technology initiative to deliver 10X more power-efficient processors. Lower processor power requirements allow innovative form factors in tablets and notebooks and are a home run in the data center. The power-efficiency initiative comes to maturity with the launch of the fourth generation of Core processors, codename Haswell, later this quarter. Power efficiency is critical to growth in mobile, discussed below.

Growth

When Otellini took over, the company focused on the chips it made, leaving the rest of the PC business to its ecosystem partners. Recent unit growth in these mature markets comes from greater focus on a broader range of customer’s computing needs, and in bringing leading technology to market rapidly and consistently. In so doing, the company gained market share in all the PC and data center product categories.

The company shifted marketing emphasis from the mature North America and Europe to emerging geographies, notably the BRIC countries — Brazil, Russia, India, and China. That formula accounted for a significant fraction of revenue growth over the past five years.

Intel’s future growth requires developing new opportunities for microprocessors:

Mobile: The early Atom processors introduced in late 2008 were designed for low-cost netbooks and nettops, not phones and tablets. Mobile was a market where the company had to reorganize, dig in, and catch up. The energy-efficiency that benefits Haswell, the communications silicon from the 2010 Infineon acquisition, and the forthcoming 14nm process in 2014 will finally allow the company to stand toe-to-toe with competitors Qualcomm, nVidia, and Samsung using the Atom brand. Mobile is a huge growth opportunity.

Software: The company acquired Wind River Systems, a specialist in real-time software in 2009, and McAfee in 2010. These added to Intel’s own developer tools business. Software services business accelerates customer time to market with new, Intel-based products. The company stepped up efforts in consumer device software, optimizing the operating systems for Google (Android), Microsoft (Windows), and Samsung (Tizen). Why? Consumer devices sell best when an integrated hardware/software/ecosystem like Apple’s iPhone exists.

Intelligent Systems: Specialized Atom systems on a chip (SoCs) with Wind River software and Infineon mobile communications radios are increasingly being designed into medical devices, factory machines, automobiles, and new product categories such as digital signage. While the global “embedded systems” market lacks the pizzazz of mobile, it is well north of $20 billion in size.

Competition

AMD today is a considerably reduced competitive threat, and Intel has gained back #1 market share in PCs, notebooks, and data center.

Growth into the mobile markets is opening a new set of competitors which all use the ARM chip architecture. Intel’s first hero products for mobile arrive later this year, and the battle will be on.

Financial

Intel has delivered solid, improved financial results to stakeholders under Otellini. With ever more efficient fabs, the company has improved gross margins. Free cash flow supports a dividend above 4%, a $5B stock buyback program, and a multi-year capital expense program targeted at building industry-leading fabs.

The changes in financial results are summarized in the table below, showing the year before Otellini took over as CEO through the end of 2012.

GAAP	2004	2012	Change
Revenue	34.2B	53.3B	55.8%
Operating Income	10.1B	14.6B	44.6%
Net Income	7.5B	11B	46.7%
EPS	$1.16	$2.13	83.6%

The Paul Otellini Legacy

There will be books written about Paul Otellini and his eight years at the helm of Intel. A leader should be measured by the institution he or she leaves behind. I conclude those books will describe Intel in 2013 as excelling in managed innovation, systematic growth, and shrewd risk-taking:

Managed Innovation: Intel and other tech companies always are innovative. But Intel manages innovation among the best, on a repeatable schedule and with very high quality. That’s uncommon and exceedingly difficult to do with consistency. For example, the Tick-Tock model is a business school case study: churning out ground-breaking transistor technology, processors, and high-quality leading-edge manufacturing at a predictable, steady pace of engineering to volume manufacturing. This repeatable process is Intel’s crown jewel, and is a national asset.

Systematic Growth: Under Otellini, Intel made multi-billion dollar investments in each of the mobile, software, and intelligent systems markets. Most of the payback growth will come in the future, and will be worth tens of billions in ROI.

The company looks at the Total Addressable Market (TAM) for digital processors, decides what segments are most profitable now and in the near future, and develops capacity and go-to-market plans to capture top-three market share. TAM models are very common in the tech industry. But Intel is the only company constantly looking at the entire global TAM for processors and related silicon. With an IA computing continuum of products in place, plans to achieve more growth in all segments are realistic.

Shrewd Risk-Taking: The company is investing $35 billion in capital expenses for new chip-making plants and equipment, creating manufacturing flexibility, foundry opportunities, and demonstrating a commitment to keep at the forefront of chip-making technology. By winning the battle for cheaper and faster transistors, Intel ensures itself a large share of a growing pie while keeping competitors playing catch-up.

History and not analysts will grade the legacy of Paul Otellini as CEO at Intel. I am comfortable in predicting he will be well regarded.

Follow me on Twitter @PeterSKastner