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.

Just two years ago, Samsung was far behind Apple and others in the race to win the global smartphone market. Now, Samsung is running neck and neck with Apple, capturing a 30.4% market share and 25% of industry-wide profits. Samsung is on the verge of launching the Galaxy S4 which could further solidify its leadership position.

How did Samsung catch up in the smartphone market in such a short period of time? I’ve been traveling to South Korea every year since 2010 and I’ve had a chance to talk with professionals from various companies in the region. Based on conversations, I believe the following factors have played a central role in Samsung’s rapid ascent in the smartphone market.

National support: Samsung is South Korea’s flagship company, producing about a fifth of the country’s GDP. With its central importance to the South Korean economy, Samsung has developed close ties to government and other local companies. It also has strong relationships with the leading universities and is able to hire the best graduates. In short, competing with Samsung is like you’re competing with all of South Korea (combined with Samsung’s global operations).

Execution capabilities: Samsung not only gained a lead in smartphones, but accomplished this feat in a very short period of time. This suggests to me that Samsung has tremendous execution capabilities. These capabilities are likely derived from its significant experience with new product development, talented executives at the top, highly skilled managers and engineers, and strong organization and work ethic.

Technology: The Samsung Electronics subsidiary has leading businesses in a variety of related and complementary technical areas, such as LCD displays, semiconductors, and rechargeable batteries. The in-house resources and capabilities that come from these businesses likely give Samsung a significant advantage in the smartphone space. For instance, its smartphone business can leverage engineering talent and proprietary technology that resides in its semiconductor businesses.

Corporate culture: Samsung executives and employees, and South Korean workers in general, are under enormous pressure to remain globally competitive. It’s operating under a constant state of crisis. This can be a tremendous motivating force, at least for a period of time until the pressure drives turnover. This pressure can also dampen creativity and the tolerance for failure, together reducing Samsung’s ability to strike first in new, untested markets. Samsung is counteracting some of these headwinds by investing heavily in “Worldwide Innovation Centers” and other related initiatives.

Conclusion

In closing, Samsung was able to quickly ascend to the top of the smartphone market in large part by leveraging its unique, corporate-wide resources and capabilities. These resources and capabilities have now proven valuable across multiple businesses. They will continue to provide Samsung with a significant and sustainable corporate advantage as it competes for dominance in the post-PC era and beyond.

The reviews are in (see below) and they are decidedly mixed. The Surface Pro is an interesting concept, but marrying a PC with a tablet form factor requires too many design trade-offs. This combination is also expensive to produce, pushing its retail price up (the Surface Pro starts at $899).

Ultimately, the success of the Surface Pro may rest on how consumers conceptualize the device, as a PC and tablet in one, as a more portable notebook, or as a higher performing tablet. As a PC and tablet in one, I think the Surface Pro has major shortcomings. As a more portable notebook, the value proposition is more compelling, at least in my mind. Microsoft should consider driving the conversation forward in this direction.

AllThingsD - Surface Pro: Hefty Tablet Is a Laptop Lightweight

Some users may not mind the price or bulk of the Surface Pro if it frees them from carrying a tablet for some uses and a laptop for others…like many products that try to be two things at once, the new Surface Windows 8 Pro does neither as well as those designed for one function.

Anandtech – Microsoft Surface Pro Review

Surface Pro is probably the best foot forward towards converging those two usage models [notebook and tablet], but it’s not perfect for everyone yet.

ArsTechnica - Microsoft Surface with Windows 8 Pro: Hotter, Thicker, Faster, Louder

The design fundamentally doesn’t work.

Engadget – Microsoft Surface Pro Review

…sadly Microsoft’s second tablet doesn’t have us reaching for our credit cards. Not quite yet.

Mashable - Microsoft Surface Pro: Finally, a Worthy Flagship for Windows 

The Surface Pro is a great all-in-one gateway to your digital life, work and play…[but] the Surface Pro should not be your go-to device if you really want a tablet experience.

New York Times - It’s a Tablet. No, It’s a PC. Surface Pro Is Both.

So in the end, the Surface Pro isn’t for everyone, it isn’t all it seemed at first, and it isn’t all it could be…Even so, there’s a lot to admire in Microsoft’s accomplishment. The Surface Pro is an important idea, almost a new category, and it will be the right machine for a lot of people.

PCWorld - Surface Pro is the world’s best Windows tablet, but still can’t close the deal

You’re getting so, so close to that sublime, perfect marriage of tablet and PC. Surface Pro isn’t the answer—but it comes close.

ZDNet - Is the brilliant, quirky, flawed Surface Pro right for you

I don’t expect Surface Pro to be a breakout hit for Microsoft. Too many people will have good reasons to say no, at least for now. But it does represent a solid, interesting, adventurous alternative for anyone who wants to spend some quality time today exploring Microsoft’s vision of the future.

The Surface Pro and the Million Dollar Question

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The New York Times rolled out a paywall in March 2011. Unlike most paywalls, the Times paywall is easy to bypass. The process is well documented all over the web. A Google search for “how to bypass the New York Times paywall,” in quotation marks, returns over 100,000 results. If the paywall is easy to [...]

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Y Combinator’s Hacker News Advantage

December 24, 2012

Hacker News (HN) is the news aggregator site run by Y Combinator (YC), the seed accelerator led by Paul Graham. According to this October 2011 posting, HN generates a staggering 120k unique visits every weekday, which is significantly more traffic than both DaringFireball and Techmeme, two popular technology sites. The question I’d like to consider in this article [...]

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