The End of x86? An Update

by mjfern

In October 2010, I predicted the disruption of the x86 architecture, along with its major proponents Intel and AMD. The purpose of this current article is to reassess this prediction in light of recent events. Below, I present the classic signs of disruption (drawing on Clayton Christensen’s framework), my original arguments in blockquotes, and then an update.

1. The current technology is overshooting the needs of the mass market.

Due to a development trajectory that has followed in lockstep with Moore’s Law, and the emergence of cloud computing, the latest generation of x86 processors now exceed the performance needs of the majority of customers. Because many customers are content with older generation microprocessors, they are holding on to their computers for longer periods of time, or if purchasing new computers, are seeking out machines that contain lower performing and less expensive microprocessors.

x86 shipments dropped by 9% in Q3 2012. Furthermore, the expected surge in PC sales (and x86 shipments) in Q4 due to the release of Windows 8 has failed to materialize. NPD data indicates that Windows PCs sales in U.S. retail stores fell a staggering 21% in the four-week period from October 21 to November 17, compared to the same period the previous year. [1] In short, there is now falling demand for x86 processors. Computer buyers are shifting their spending from PCs to next generation computing devices, including smartphones and tablets.

2. A new technology emerges that excels on different dimensions of performance.

While the x86 architecture excels on processing power – the number of instructions handled within a given period of time – the ARM architecture excels at energy efficiency. According to Data Respons (datarespons.com, 2010), an “ARM-based system typically uses as little as 2 watts, whereas a fully optimized Intel Atom solution uses 5 or 6 watts.” The ARM architecture also has an advantage in form factor, enabling OEMs to design and produce smaller devices.

While Intel has closed the ARM energy efficiency gap with its latest x86 Atom processers, the latest generation ARM-based chips are outperforming their Atom counterparts. And the performance advantage of ARM-based processors is expected through 2013. The ARM architecture also continues to maintain a significant advantage in the area of customization, form factor, and price due to ARM Holding’s unique licensing-based business model. Because of these additional benefits of ARM technology, it’s unlikely that Intel’s energy efficiency gains will significantly affect its short-term market penetration.

3. Because this new technology excels on a different dimension of performance, it initially attracts a new market segment.

While x86 is the mainstay technology in PCs, the ARM processor has gained significant market share in the embedded systems and mobile devices markets. ARM-based processors are used in more than 95% of mobile phones (InformationWeek, 2010). And the ARM architecture is now the main choice for deployments of Google’s Android and is the basis of Apple’s A4 system on a chip, which is used in the latest generation iPod Touch and Apple TV, as well as the iPhone 4 and iPad.

ARM-based processors continue to dominate smartphones and tablets, with the ARM architecture maintaining a market share of 95% and 98%, respectively. [2] In the first half of 2012, there were just six phones with x86 chips inside (i.e., 0.2% of the worldwide market). And, as of December 2012, there was scarce availability of tablets with x86 processors. [3] A major concern going forward is that Intel is limiting tablet support to Windows 8.

4. Once the new technology gains a foothold in a new market segment, further technology improvements enable it to move up-market, displacing the incumbent technology.

With its foothold in the embedded systems and mobile markets, ARM technology continues to improve. The latest generation ARM chip (the Cortex-A15) retains the energy efficiency of its predecessors, but has a clock speed of up to 2.5 GHz, making it competitive with Intel’s chips from the standpoint of processing power. As evidence of ARM’s move up-market, the startup Smooth-Stone recently raised $48m in venture funding to produce energy efficient, high performance chips based on ARM to be used in servers and data centers. I suspect we will begin seeing the ARM architecture in next generation latops, netbooks, and smartphones (e.g., A4 in a MacBook Air).

ARM’s latest Cortex-A15 processor is highly competitive with Intel’s Atom line of processors. In a benchmarking analysis, “the [ARM-based] Samsung Exynos 5 Dual…easily beat out all of the tested Intel Atom processors.” And while Intel’s Core i3 processors outperformed the ARM-based processors, the iCore’s performance-per-watt makes it unsuitable for smartphones and tablets. Since energy conservation and cost is a growing concern among manufacturers, IT departments, and consumers, ARM-based chips are also moving upmarket into more demanding devices. While ARM technology hasn’t made much headway in traditional desktop PCs and laptops, it’s been deployed in the latest generation Google Chromebook, produced by Samsung. It’s also the processor of choice in Microsoft’s Surface RT, which is arguably a hybrid device (PC and tablet) given it runs Windows and Office and has a keyboard. Furthermore, ARM’s penetration of the server market is ushering in a new “microserver” era, with support from AMD, Calxeda, Dell, HP, Marvell, Samsung, Texas Instruments, and others (e.g., Applied Micro). [4]

5. The new, disruptive technology looks financially unattractive to established companies, in part because they have a higher cost structure.

In 2009, Intel’s costs of sales and operating expenses were a combined $29.6 billion. In contrast, ARM Holdings, the company that develops and supports the ARM architecture, had total expenses (cost of sales and operating) of  $259 million. Unlike Intel, ARM does not produce and manufacture chips; instead it licenses its technology to OEMs and other parties and the chips are often manufactured using a contract foundry (e.g., TSMC). Given ARM’s low cost structure, and the competition in the foundry market, “ARM offers a considerably cheaper total solution than the x86 architecture can at present…” (datarespons.com, 2010). Intel is loathe to follow ARM’s licensing model because it would reduce Intel’s revenues and profitability substantially.

In the first three quarters of 2012, Intel had revenue of $38.864 billion, operating expenses of $28.509b, and operating income of $11.355b. In contrast, ARM Holdings, with its licensing-based business model, had revenue of $886.88 million, operating expenses of $576.5m, and operating income of $307.12m. ARM Holdings has revenues and profits that are just a fraction (2-3%) of Intel’s. This is the case even though ARM-based processors have a much greater share of the overall processor market. [5] The smartphone and tablet markets, despite their sheer size and growth rates, are financially unattractive in comparison to the PC market. The price point and margins on processors in the mobile markets are significantly lower than that of higher-end PC and server processors. For instance, as of November 2012, the “Atom processor division contribute[d] only around 2% to Intel’s valuation.”

In short, the ARM architecture appears to be in the early stages of disrupting x86, not just in the mobile and embedded systems markets, but also in the personal computer and server markets, the strongholds of Intel and AMD. This is evidenced in part by investors’ expectations for ARM’s, Intel’s and AMD’s future performance in microprocessor markets: today ARM Holdings has a price to earnings ratio of 77.93, while Intel and AMD have price to earnings ratios of 10.63 and 4.26, respectively.

It doesn’t appear Intel (or AMD) have solved the disruptive threat posed by ARM. The ARM architecture is maintaining its market share in smartphones and tablets, and gaining ground in upmarket devices, from hybrids (Chromebook and Surface RT) to servers. Investors concur with this assessment, as ARM Holdings has a price to earnings ratio of 70.74, while Intel has a price to earnings ratio of 9.22. [6]

For Intel and AMD to avoid being disrupted, they must offer customers a microprocessor with comparable (or better) processing power and energy efficiency relative to the latest generation ARM chips, and offer this product to customers at the same (or lower) price point relative to the ARM license plus the costs of manufacturing using a contract foundry. The Intel Atom is a strong move in this direction, but the Atom is facing resistance in the mobile market and emerging thin device markets (e.g., tablets) due to concerns about its energy efficiency, form factor, and price point.

While Intel has closed the energy efficiency gap with its latest Atom processors, it still lags in performance and hasn’t dealt with the issues of customization and form factor. It’s likely that its pricing also remains unattractive. Although I don’t have precise data on Intel or ARM’s pricing for comparable processors, one can get an estimate by comparing Intel’s listed processor prices with teardown data from iSuppli. According to this rough analysis, the latest Atom processors range in price from $42-$75, while ARM-based processors have prices (including manufacturing) in the $15-25 range. [7] Therefore, Intel would need to offer a 60%+ discount off list prices to just achieve parity.

The x86 architecture is supported by a massive ecosystem of suppliers (e.g., Applied Materials), customers (e.g., Dell), and complements (e.g., Microsoft Windows). If Intel and AMD are not able to fend off ARM, and the ARM architecture does displace x86, it would cause turbulence for a large number of companies.

This turbulence is now real and visible. The major companies that makeup the x86 ecosystem, including producers (Intel and AMD), suppliers (e.g., Applied Materials), customers (e.g., Dell and HP), and complements (e.g., Microsoft), are all struggling to gain the confidence of investors. Each has underperformed stock market averages over the last two years and many are now implementing their own ARM-based strategies, remarkably even x86 stalwarts AMD and Microsoft. Meanwhile, Paul Otellini, Intel’s CEO, retired suddenly and unexpectedly, just last month.

Intel, in particular, faces a precarious situation. It can harvest its tremendous profits in the PC market for the next several years or it can compete in the next generation of processors by aggressively developing low-margin processors and replicating ARM Holding’s licensing-based business model. [7] It’s a choice between serving a known, highly profitable market (in the shorter-term) and possibly winning in a comparatively unknown, unprofitable market (in the longer-term). As a professional executive or manager, which option would you choose? Thus we have the innovator’s dilemma.

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[1] This contrasts significantly with the sales impact from the launch of Windows 7, when sales of Windows PCs rose 49% during the first week Windows 7 was on sale, compared to the previous year.

[2] While Apple has an instruction set license to execute ARM commands, it designed its own custom ARM compatible CPU core for the iPhone 5 and iPad 4.

[3] Intel reports having 20 tablets in its pipeline for launch by the end of this year.

[4] Intel’s efforts to create a new market segment for its x86 microprocessors, such as Ultrabooks, has thus far underperformed expectations.

[5] I wasn’t able to find data on Intel processor shipments in 2011, but as a rough comparison, it looks like ARM and its licensees shipped 7.9b processors in 2011, while worldwide PC shipments totalled 352.8m units. In 2011, Intel had a roughly 80% market share in the PC market.

[6] AMD had net loss in its latest quarter and thus you cannot compute a price to earnings ratio.

[7] Intel could obtain an ARM license and enter the contract foundry business, but analysts expect such a move would also have a significant drag on its margins and profitability.

  • mjfern

    I’d love to hear your thoughts/feedback on my post. Thank you!

  • Matt

    I strongly believe that Apple will ship laptop computers with both Intel and ARM chips onboard in the next year or two. Most desktop applications would be happy to run on the ARM (and the kernel itself), allowing the device to aggressively power down the Intel CPU when power-hungry applications like the iMovie renderer or VMs aren’t open.

    Given what Apple’s kernel engineering team has been capable of in the past, I don’t put it past them to be able to ship a dual-architecture computer.

  • mjfern

    Hi Matt, Thanks for the great comment. I agree there’s a possibility that Apple will ship laptops in the next few years with ARM-based processors. The current issue is that ARM-based chips are still behind Intel chips in terms of processing power (e.g., ARM-based chips versus Intel’s Core line). This could quickly change, however, if ARM advances its technology to the point that its chips meet the demands of most laptop buyers. Best, Michael

  • Matt

    Just to clarify – I believe they will ship a laptop with *both* ARM and Intel on the same motherboard. :)

  • http://profile.yahoo.com/Z4FQB6UEDKRC5KJHRCEUNBAIWE Matt E

    If one of the ARM technology partners can make a laptop processor with the power of a Core2 Duo, with much lower energy requirements, it will be a game changer. I wouldn’t count Intel out yet, but they are in for the fight of their lives. I do believe that because of the way ARM licenses out the design and fabrication of CPU’s, they will prevail in the long run.

  • mjfern

    Ah, I misunderstood. The pros being that Apple laptops can run x86 and ARM compatible software, and benefit from x86 performance, the cons being form factor (slightly more space needed) and power consumption? I’d love to hear your thoughts on this. Why both types of processors?

  • Matt

    I blogged about this last year after the idea popped into my head. The idea seemed so obvious to me that it would be crazy for them not to do it:

    http://grack.com/blog/2011/05/07/how-apple-can-make-use-of-arm-and-intel-in-its-laptop-line/
    The main takeaway is that you can get the best of both worlds: ARM runs the kernel and most of the apps on the device, extending laptop runtimes into 20+ hour territory for light-to-average workloads that don’t need the power of an i5 or i7. For the heavier workloads, the 64-bit CPU is fired up – but only to the degree that the processes that actually require it (ie: some or all of the cores could be sleeping on it).

    There’s a pretty big precedent for this with the dual-GPU MacBook Pros. Those devices use integrated video most of the time, then seamlessly switch the the discrete video when needed. With dual-architecture MacBooks, you’d be running different sets of processes on each CPU (although most processes like would prefer to be started on the ARM).

    Apple could even go one further and offer Grand Central Dispatch as a method of dispatching heavy-weight tasks to the x64 for processes that are running on the ARM.

  • mjfern

    Hi Matt, Thanks for the comment! Great points. I wouldn’t count Intel out either, given their technology and fabs, R&D capabilities, and substantial financial resources. But they need to shift gears quickly even if it means significantly cannibalizing their higher-end processer business. If they wait much longer, then it’s too late. 

    To your point, the biggest challenge for Intel is what to do about ARM’s licensing-based business model. Perhaps they can take a multi-pronged approach. Match ARM’s business model with the x86, become an ARM licensee, and aggressively enter the foundry business for x86 and ARM-based processors to maintain as much market share in chip production as possible. Food for thought…

  • mjfern

    Thanks, Matt! I just read your blog post and shared via Twitter. As an analogy, albeit overly simplistic, it reminds me of a hybrid car, with gas (x86) and electric engines (ARM). Conserve energy whenever possible, have access to more power when it’s needed. 

  • Matt

    That’s a perfect analogy.

  • http://blog.davor.se/ Davor Babic

    My first thought on this was that it’s crazy and that they would never do it. But then I realized that some manufacturers are already doing this with GPUs. So, who knows what might happen…
    Although, even in the unlikely scenario that they go with multiple processors, I still think it would be crazy for them to go with two so entirely different architectures. It just wouldn’t make sense.

  • http://twitter.com/riskpundit Bill Frank

    You ought to give credit where credit is due. All you have done is applied Clayton Christensen’s “Innovator’s Dilemma” theory to the CPU chip market. 

  • mjfern

    Hi Bill, In the first paragraph, I state: “I present the classic signs of disruption (drawing on Christensen’s framework)…” And then in my original post, I state: “ Drawing on work by Clayton Christensen, the classic signs of disruption are as follows…” Is this not sufficient credit to Christensen?

  • http://twitter.com/riskpundit Bill Frank

    Sorry, I missed your reference to Christensen. Perhaps you could have linked to one of his books. Also there is a pretty good Wikipedia article: http://en.wikipedia.org/wiki/Disruptive_innovation

  • James

    OS X also already has an application architecture that directly supports this model. When Apple made the transition from PPC to x86 they had the concept of “fat binaries”. This would work perfectly with Matt’s suggested design. I’ve been skeptical of the ARM in the MacBook Air argument in the past but this makes much more sense. I like it, thanks.

  • http://twitter.com/jdrch jdrch

     Matt: Core 2 Duos are dead slow compared Ivy Bridge i7 CPUs.

  • jb

    I like your post. It has references to lots of data points. That’s always the mark of a well-trained thinker and well-researched arguments. I’d like to point your attention to a couple more data points that compare the recently released “Clover Trail” family of Atom processors to similar ARM-based processors:
    http://semiaccurate.com/2012/12/17/atom-versus-tegra-3-in-windows-8-tablets/#.UNZOfI7qvkx
    http://www.anandtech.com/show/6522/the-clover-trail-atom-z2760-review-acers-w510-tested/4
    http://hothardware.com/Reviews/Intel-Clovertrail-Atom-Z2760-Windows-8-Tablet-Performance-Preview/?page=3
    http://liliputing.com/2012/12/intels-clover-trail-tested-it-beats-most-arm-based-chips-most-of-the-time.html
    In full disclosure, I am a graduate student who studies software for low-power devices, so I have time and interest to think about these things and Intel does employ me as an Intern to help write some code. That being said, the reviews are pretty positive for the Atom processor. You reference the phoronix.com article a couple times in your post. I think they do good work, but it’s unfortunate that they didn’t include the Atom Z2760 in their comparison, even though it was published only a few weeks ago. So, I’m not so sure we can still say the latest ARM chips are outperforming their Atom counterparts, especially when the Atom chips have “closed the energy efficiency gap.” One more datapoint is Engadget’s comparison of the Motorola’s Razr-m and Razr-i (http://www.engadget.com/2012/10/04/motorola-razr-i-review/), with the Razr-m having an ARM chip and Razr-i having an Intel chip being just about the only difference between the two. The two chips had similar benchmark scores and the Razr-i had a longer battery life. 

    I like a lot of your other points about how Intel needs to compete to grow and stay relevant in the mobile processor space. As you say, “the turbulence is real and visible.” From what I see, Intel as a company, recognizes this and is prepared, or is preparing to be in it for the long haul. They have this brilliant “tick-tock” (http://en.wikipedia.org/wiki/Intel_Tick-Tock) strategy that’s played out well for them and I can only assume their mobile chips are going to get better.

  • jb

    I see posting links inside parentheses isn’t a good idea, so here are the correct Engadget and wikipedia links:
    http://www.engadget.com/2012/10/04/motorola-razr-i-review/
    http://en.wikipedia.org/wiki/Intel_Tick-Tock

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  • mjfern

    Good point on the links. I’ve added a link to the following in both of my posts: http://en.wikipedia.org/wiki/Disruptive_innovation

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  • mjfern

    Hi JB, Thanks for the excellent comment. I’m sorry for the delay in responding. I think Intel’s biggest challenge is not technological, but relates to its business model. Even if Intel matches (or slightly beats) ARM’s performance-per-watt edge, customers will likely still choose ARM because its licensing model offers customers (e.g., smartphone producers) more flexibility (customization) and a lower total price (licensing, design, production). To fend off ARM, Intel needs to match ARM’s licensing model. [1] But a licensing model will have a major negative impact on Intel’s top-line revenues. Intel could compensate for some of this revenue loss by entering the foundry business, but this is a relatively low margin business. So how does Intel address ARM’s business model advantage, while maintaining its top-line revenues and margins? Best, Michael

    [1] I’m assuming Intel could also win over ARM customers if it could deliver processors that offer a significant performance advantage (e.g., 2x performance-per-watt advantage).

  • Anonymous

    This is such a brilliant article why Intel is in deep trouble, especially towards the naysayers who still thinks performance/battery life is the only single hurdle that Intel needs to overcome at this point or the ARM competition is just another AMD that could be swatted like a hapless fly.

    2013 is going to be a spectacular year, because it is going to break Intel, especially if they go full steam on the retard scale by pricing their upcoming Haswell to stratospheric proportions as rumored because think it is the best x86 chip yet and that is all that ever mattered. Mark my words.

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  • rpmt

    Apple ditched the RISC world for x86 when it transitioned from PowerPC to Intel. This was arguably a risky move, but Macs had already transitioned from 68k to PowerPC and Apple is the only personal computer manufacturer to have successfully migrated a platform between system architectures. So could Apple disrupt the game and by switching to ARM?

    Here I think the answer is less clear. First of all will be the disruption caused by the loss of backwards compatibility. True, not much noise was made when Rosetta was discontinued. However, I think this was largely because Apple’s market share had grown phenomenally since the Intel transition, not totally eclipsing the crowd of old hardcore aficionados but coming awfully close. And many of the aficionados were content to either whine and then continue buying Apple, or to apologize for Apple (“retro-compatibility will just ruin the forward march of the system!” “it’s stupid to keep depending on outdated software!” etc.).

    A lot more would be at stake, however, if Apple were to make such a disruptive move with respect to its newer and more casual user-base.

    Also, Intel has tried to move beyond the x86 and not without much success: consumer demand keeps dragging them back in, and so they’ve found clever ways to hide RISC underlyings within CISC architecture. I wouldn’t count them out quite so soon.

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