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.  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.  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.  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). 
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.  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. 
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.  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.  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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 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.
 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.
 Intel reports having 20 tablets in its pipeline for launch by the end of this year.
 Intel’s efforts to create a new market segment for its x86 microprocessors, such as Ultrabooks, has thus far underperformed expectations.
 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.
 AMD had net loss in its latest quarter and thus you cannot compute a price to earnings ratio.
 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.