Intel Cell Phone Effort A Failure Of Historic Proportions

Intel, the world's largest semiconductor company, on Tuesday finally owned up to one of the most colossal failures in that industry's history when it unloaded its communications and applications processor business to Marvell for $600 million. It's not surprising that Intel tried to slip that announcement in under the cover of its much splashier Woodcrest server processor extravaganza on Monday. There undoubtedly was a lot of anguish in Santa Clara when Intel finally bit the bullet and dropped its long battle to gain a position as a provider of processors for cell phones.Intel plowed multibillions of dollars of investment into the market with a covetous eye toward what is one of the largest volume markets available to processor manufacturers. Research firm Forward Concepts estimates that 830 million cell phones shipped in 2005, and that within two years, more than 1 billion cell phones will ship per year.

One billion units is a lot of processors, and Intel wanted its fair share. During the course of the past decade Intel invested between $3 billion and $5 billion in the assets it sold to Marvell, says Will Strauss, an analyst for Forward Concepts. Intel spent nearly $2 billion on a single acquisition to bolster those communications chip efforts. It was a major rat hole of unparalleled magnitude.

Intel in the late '90s saw Texas Instruments providing processors to more than half of the cell phone market and believed there was no reason it couldn't squeeze its way into the fray. Although many warned that it was a business that had few similarities to the PC processor market, Intel rushed forward with at least full financial commitment. It exits now with little to show but a bruised ego.

The applications processor market for cell phones totaled $839 million last year, and TI controlled 69% of the market, followed by Qualcomm at 17%. Intel for all its investment and effort had total revenue of $57 million to give it a 7% market share. In the baseband processor market for cell phones, which totals $6.5 billion, the story was even worse. Last year Intel managed less than 1% market share, Strauss says.

Strauss believes Intel may have failed from a lack of total commitment to the cell phone processor market. Intel was built on PC and server processors, and that's where the largest amount of its efforts remained. On numerous occasions over the past few years there were suggestions that Intel would spin-off the communications chip business into a standalone business where its fortune might have been different, but those rumors never materialized.

Intel's dalliance with the cell phone market may have been just distracting enough to knock it off its stride in its core business. Is it a happenstance that Intel's fixation with the cell phone market the past few years coincided with a loss of focus on its core processor market which left a opening for Advanced Micro Devices?

Of course, there is no other company with the possible exception of Microsoft that could afford to make the kind of unsuccessful gamble that Intel made on the cell phone market. Despite missing the target in the cell phone market, Intel remains strong and profitable. Although it may be true that if nothing is ventured, nothing is gained, you have to think that Intel continues to question itself internally over the magnitude of this miscalculation.