Intel takes aim at ARM, maybe

AS ANALYSTS and journalists were jolted awake from the August doldrums by the news that Intel decided to spend $7.68 billion on insecurity outfit McAfee, the shock quickly turned to curiosity, wondering what the chipmaker wants from such an acquisition.

On a conference call just hours after the announcement hit the wires, investment analysts seemed baffled, with one asking whether it was really necessary for Intel to purchase McAfee rather than collaborate with the firm. Apparently collaboration wasn't enough for Intel, as it admitted that the two companies had been working together for 18 months prior to announcing this deal.

Curiosity is partly piqued by the amount of money involved. Even for Intel, $7.68 billion is a lot of dosh and this isn't merely a stock swap or an accounting sleight of hand, real hard cash will change hands, or at least bank accounts. So what does all that money buy for Intel?

The answer, at least according to Intel in its teleconference today, is the mobile market.

Intel time and again mentioned that it is no longer just a chipmaker, wanting to be front of house and part of the action in the consumer marketplace. While McAfee gives Intel tangible products in the form of security software, for Intel the deal means more than just shifting annual 'security' subscriptions to Microsoft Windows users. Intel seemingly believes that security, whether it be in the form of software or a service, is something that can not only generate revenue but also give it a strategic advantage against its competitors on all sides.

The firm's software side has operated under the radar for decades, working on technologies such as audio and video codecs, video conferencing, compilers and of course drivers. But make no mistake, this deal doesn't mean that Intel will somehow ditch its hardware roots. No, this is about promoting its hardware, protecting it from competition, and gaining strategic leverage.

One would be forgiven for thinking that it was McAfee that had bought Intel from listening to Intel's CEO Paul Otellini painting a world of doom and gloom, firing out figures from McAfee's past releases. He even mentioned the right buzz-words, maintaining that the threat was in the cloud. It was clear that Intel's job was to play up the relevance of McAfee and why consumers need its software. Why? Because eventually Intel hardware will run security software code that's been designed, built and tested by McAfee better and faster than anything else on the market.

As for which market, it's clear that Intel isn't bothering too much about the desktop or laptop markets. The fact is, even with cumbersome security software from McAfee, Symantec and the others, thanks to processors with multiple cores, there is little perceived performance degradation. On smartphones and devices that run embedded chips, power consumption is king, and the story changes completely.

In the mobile space, Intel is nowhere. The plucky Brit firm ARM has licensed its designed to just about every mobile chip firm out there, so regardless of whether you purchase a smartphone from Apple, HTC or Samsung, odds are it'll be running an ARM chip. For Intel, once the hardware arrives, in the shape of an Atom processor or one its successors, it will need a unique selling point and that's where McAfee will come in.

As Ofcom's report highlighted, smartphones have caused a surge in mobile data usage. Intel might play on this fact to spread the fear that connected devices, whether they be smartphones, televisions or computers need security features built in. Intel is hoping that by "deeply integrating" security within its mobile CPU chips and chipset platforms, it might be able to compete in power usage with ARM.

Intel also took this opportunity to say that its acquisition of McAfee "augments mobile wireless strategy". It's this strategy that has fueled persistent rumours that the chipmaker will make a bid for Infineon's wireless business. Intel does have more than enough cash to buy not only Infineon's wireless unit but also the whole company, which is valued at around €5.3 billion.

Purchasing Infineon's wireless unit would in many ways be a signal of intent that it wants to get into the mobile device manufacturing business. However, with the purchase of McAfee, a deal with Infineon seems less likely. Aside from using up $7.68 billion, buying McAfee suggests that Intel is more interested in getting software to run on its processors rather than building a smartphone to showcase its products. As one retired Intel old-timer said, the firm doesn't get into any manufacturing business where it cannot shoot for a 40 per cent gross profit margin.

These days those sorts of heady figures are unlikely, if not unrealistic, however the sentiment still holds true. Intel is likely to make a lot more by selling its chips that can run what it will claim is vital software to numerous handset vendors rather than going it alone. You don't have to look far for examples, Google's Nexus One smartphone being a most obvious one.

Even with the press and the world's most viewed billboard available, it was Motorola's Droid that outsold the Google phone. Google could afford to hedge its bets but for Intel, the mobile market has done quite well without it so far, so it needs a strategy to seem indispensible.

Intel said that the first "fruits of its collaboration" with McAfee will appear in 2011, however the "deep integration" it mentioned repeatedly will be seen nearer the middle of the coming decade. For Intel, this acquisition seems to be all about software, as it categorically stated that its hardware is ready, though it did mention that its Atom processor line will get an update shortly.

Those fruits need to ripen very quickly, otherwise the vast amount of money that Intel has just spent to get a firm foothold in the mobile market could very well embarrass the company.

Or there could be something else - or several somethings else - going on here, and we just don't have enough information to figure out what's up yet. µ