[Apple Shockwave]⑪ The Harsh Price Intel Paid for Rejecting the Opportunity to Sell iPhone Chips

Intel Market Cap Once Dominating Apple Falls to 5% as Apple Surges with ARM Technology
Intel Refuses iPhone Chip Supply and Sells ARM Chip Business

Editor's Note[Apple Shockwave] is a content series that examines the upheaval caused by Apple entering the semiconductor market. You might wonder why Apple is involved in semiconductors. Apple is no longer just a company that makes smartphones and computers. After long efforts starting from the founder Steve Jobs, Apple has designed world-class semiconductors used in mobile devices. If Intel was the leader in the PC era, Apple has become the top predator in the semiconductor ecosystem of the mobile era. Amid the global semiconductor supply chain crisis and large-scale investments in semiconductor production facilities, we will carefully examine the upheaval and prospects in the semiconductor market brought about by Apple Silicon to broaden our readers' insight. Apple Shockwave will visit readers every Saturday. After more than 40 installments, it will be published as a book.

"I had to follow my intuition, not the data. My intuition told me to approve the iPhone business." - Paul Otellini, former Intel CEO

British semiconductor design company ARM is also the starting point of Apple Silicon. A critical factor was a misjudgment by one company: Intel, once the world's largest semiconductor company. If Intel had developed chips for the iPhone through cooperation with ARM, the dynamics of the semiconductor and IT markets today could look very different. It means that Intel's chips, instead of Apple Silicon, might have been used in the iPhone, MacBook, and iPad. Of course, this is just hypothetical.

Apple founder Steve Jobs made a bold decision in the early 2000s when the performance of in-house developed semiconductors fell short of expectations. Jobs partnered with Intel, a rival of Apple and a partner of Microsoft. In January 2006, Jobs introduced a PC using Intel's x86 CPU, causing a stir in the semiconductor and computer industries. Paul Otellini, then Intel CEO, who appeared at the Apple event, cheered. Intel seemed to have secured a clear advantage over its rival AMD with Apple. They believed the battle was decided by dominance in the desktop PC and server chip markets. It was a misconception.

Otellini was the first Intel CEO who was not an engineer. Until his predecessor Craig Barrett, Intel was led by people involved in chip design and production. Otellini's arrival signaled a change at Intel. Around one year into his tenure, Otellini landed the big catch: Apple.

Intel's start under Otellini was brilliantly ignited by the great success of the 'Core' series CPUs and cooperation with Apple. Intel's status as the world's number one semiconductor company was like a fortress. Intel did not allow others to surpass it in fine process technology. Although the Samsung Electronics-IBM alliance threatened Intel, it was overwhelmed. During Otellini's tenure as CEO, Intel earned more profits than in the previous 45 years combined.

Let's look at semiconductor industry performance in 2012. Intel's revenue in 2012 was $11 billion. At that time, Nvidia, now the semiconductor industry's largest by market capitalization, was making only $580 million in profit. The profit gap between the two companies reflects Intel's status at the time. Meanwhile, AMD was suffering large losses. Over a decade later, Intel is valued lower on the stock market than Nvidia, AMD, and even TSMC. The market capitalization gap between Apple and Intel is more than 20 times. This is an example of how fortunes rise and fall.

The Fall of the Impregnable Semiconductor Giant... Apple Was the Clue

Intel's fall, which experienced moments of glory with Otellini, was also dramatic. The trigger for the fall came surprisingly quickly: refusal to cooperate with Apple.

Shortly after Intel Mac PCs appeared on the market in 2006, Jobs proposed to Otellini that Intel supply chips for the iPhone. Of course, Jobs and the Cook duo were not willing to make many concessions to Intel. Intel did not worry much either. They had CPUs that made huge profits, so the decision was easy.

Jobs had a reason to want to partner with Intel. Intel had ARM-based chips. Intel had acquired the mobile system-on-chip (SoC) called 'StrongARM,' developed by Digital Equipment Corporation (DEC), through intense litigation.

DEC was an important player in the semiconductor and computer industries, having created the outstanding 'Alpha' chip. As the name suggests, StrongARM was a chip based on ARM design.

DEC sued Intel, claiming Intel copied the Alpha chip to make the Pentium CPU. The two companies settled in 1997, with DEC selling the StrongARM division to Intel. Intel renamed StrongARM to 'XScale' and sold it as a chip for personal digital assistants (PDAs). In the early 2000s, XScale chips were used in PDAs made by Palm, HP, and Samsung Electronics. If you were a PDA user in the early 2000s, you likely used a chip produced by Intel.

Intel's response to Jobs' proposal was rejection. Otellini detailed the situation in a 2013 interview with the magazine The Atlantic. He explained that Intel did not supply chips for the iPhone because the price Apple demanded was unacceptable. Otellini said Apple's requested price was below cost. Intel was making sufficient profits from the CPU business and had no reason to supply mobile chips to Apple at a low price.

Intel's choice was a clear turning point for Apple to shift toward semiconductor development. Dan Dobberpuhl, who led the design of DEC's main chips, founded his own company and became independent shortly after Intel acquired StrongARM. In 2003, he established the semiconductor design company PA Semi, naturally to develop low-power mobile chips. PA Semi was later acquired by Apple. Apple embraced an SoC design company created by DEC veterans based on ARM design. After acquiring PA Semi, Apple focused on semiconductor design and steadily improved the performance of chips for iPhone and iPad.

Ultimately, the card Intel discarded became a boomerang aimed at Intel itself. While ARM-based chips continued to advance, Intel's alternative, the 'Atom' chip developed in-house instead of XScale, struggled.

Intel even sold off the XScale business unit in 2006 for just $600 million, only a year before the iPhone's launch. Intel missed a critical opportunity at the dawn of the mobile era.

Unlike Intel, Apple used ARM-based chips manufactured by Samsung Electronics in the first iPhone and began its own design with the 'A4' in 2010. Based on ARM design, Apple rapidly developed chips with improved performance.

Intel, Which Embraced Then Abandoned... ARM's Secret Weapon Unveiled

Around the same time, ARM unveiled its secret weapon. The core of ARM semiconductor design today is 'Cortex.' ARM succeeded in directly overcoming the criticism that Cortex had low power consumption but poor performance.

The author witnessed ARM's blueprint at a press conference introducing Cortex in Korea in 2005 but found it hard to fully accept ARM's confidence at the time.

At that time, Kim Young-seop, president of ARM Korea, confidently stated, "The new ARM Cortex-A8 processor will bring unprecedented performance and energy efficiency to the consumer electronics and mobile markets." It did not take long for this unlikely prediction to become reality.

Today, many know ARM's name, but back then, outside the semiconductor industry, few were familiar with ARM. The business model of selling semiconductor designs was also hard to understand. Skepticism was widespread, as if saying, "Can that really work?" Compared to today's scene where integrated device manufacturers, foundries, and fabless companies all look to ARM, it was like a story from the distant past.

Intel's misjudgment remains a decisive management failure not only in semiconductors but also in global corporate history. Intel turned down the opportunity to sell chips for the iPhone, which sells 300 million units annually. Of course, at the time, no one could have imagined that the iPhone would sell so well or that Apple Silicon would dominate not only mobile but also PC and tablet markets. It is hard to blame Otellini for the misjudgment. Otellini recalled that iPhone sales were 100 times what Intel had expected. Of course, sales have increased even more now.

Does that mean Intel neglected investment? Intel spent $19.5 billion on research and development (R&D) in 2011 and 2012. Compared to Google's $8 billion investment at the time, this shows how much Intel invested. Investment in production facilities for advancing fine process technology also reached $20 billion. Despite investing $40 billion over two years, Intel began a difficult march.

The wound left by Apple's knife plunged into Intel's back was deep and fatal. The challenge left by previous management, which abandoned mobile chips, weighs heavily on the shoulders of current Intel CEO Pat Gelsinger, the 'savior.'