Intel's Problems Are Even Worse Than You've Heard | TLDR ARM won x86 lost

You may think you know how much Intel is struggling, but the reality is worse.

The once-mighty American innovation powerhouse is losing market share in multiple areas that are critical to its profitability. Its many competitors include not just the AI juggernaut Nvidia but smaller rivals and even previously stalwart allies like Microsoft.

One flashing warning sign: In the latest quarter reported by both companies, Intel's perennial also-ran, AMD, actually eclipsed Intel's revenue for chips that go into data centers. This is a stunning reversal: In 2022, Intel's data-center revenue was three times that of AMD.

AMD and others are making huge inroads into Intel's bread-and-butter business of making the world's most cutting-edge and powerful general-purpose chips, known as CPUs, short for central processing units.

Even worse, more and more of the chips that go into data centers are GPUs, short for graphics processing units, and Intel has minuscule market share of these high-end chips. GPUs are used for training and delivering AI.

By focusing on the all-important metric of performance per unit of energy pumped into their chips, AMD went from almost no market share in servers to its current ascendant position, says AMD Chief Technology Officer Mark Papermaster. As data centers become ever more rapacious for energy, this emphasis on efficiency has become a key advantage for AMD.

Notably, Intel still has about 75% of the market for CPUs that go into data centers. The disconnect between that figure and the company's share of revenue from selling a wider array of chips for data centers only serves to illustrate the core problem driving its reversal of fortunes.

This situation looks likely to get worse, and quickly. Many of the companies spending the most on building out new data centers are switching to chips that have nothing to do with Intel's proprietary architecture, known as x86, and are instead using a combination of a competing architecture from ARM and their own custom chip designs.

A spokeswoman for Intel says the company is focused on simplifying and strengthening its product portfolio, and advancing its manufacturing and foundry capabilities while optimizing costs. Intel interim Co-Chief Executive Michelle Johnston Holthaus recently said that 2025 will be a "year of stabilization" for the company. Intel is currently seeking a permanent leader after its CEO Pat Gelsinger was pushed out last month.

The decades that developers spent writing software for Intel's chips mean that Intel remains a giant, even as its market share has shrunk, and that legacy will limit how quickly Intel's revenues can decline in the future.

Analysts estimate Intel's 2024 revenue was about $55 billion, just behind Nvidia's approximately $60 billion. Intel still has the lion's share of the market for desktop and notebook CPUs—around 76%, overall, according to Mercury Research.

AMD recently formed an alliance with Intel to collaborate on support and development of the x86 ecosystem that both companies make chips for. Papermaster says that his own company continues to invest in this ecosystem even as AMD also develops ARM-based chips for some applications, such as networking and embedded devices.

For a concrete example of Intel's challenges, look at Amazon, the world's biggest provider of cloud computing. More than half of the CPUs Amazon has installed in its data centers over the past two years were its own custom chips based on ARM's architecture, Dave Brown, Amazon vice president of compute and networking services, said recently.

This displacement of Intel is being repeated all across the big providers and users of cloud computing services. Microsoft and Google have also built their own custom, ARM-based CPUs for their respective clouds. In every case, companies are moving in this direction because of the kind of customization, speed and efficiency that custom silicon allows.

All those companies are also making their own custom, ARM-based chips for AI workloads, an area where Intel has missed the boat almost entirely. Then there's the 800-pound gorilla in AI, Nvidia. Many of Nvidia's current-generation AI systems have Intel CPUs in them, but ARM-based chips are increasingly taking center stage in the company's bleeding-edge hardware.

Intel's repeated flubs in entering markets for new kinds of computing and new applications for chips are a textbook example of a big, profitable incumbent becoming a victim of the innovator's dilemma, says Doug O'Laughlin, an industry analyst at SemiAnalysis, which recently published a blistering report on Intel. The innovator's dilemma holds that powerful companies that are unwilling to cannibalize their biggest sources of revenue can be overtaken by upstarts that build competing products that start out small, but which can ultimately take over the market which the incumbent dominates—like the mobile chips which ARM started off with.

In 1988, former Intel CEO Andy Grove published a book called Only the Paranoid Survive, which highlighted the ways that companies have to be vigilant about what's coming next, and be willing to disrupt themselves and pursue new technologies.

What he intended as a warning to all companies has since become a prophecy foretelling Intel's current difficulties.

"The book is literally about the importance of not missing strategic inflections, and then Intel proceeds to miss every single strategic inflection since," says O'Laughlin.

Then there are laptops. After decades of trying to make it happen, 2024 was finally the year of credible, ARM-based laptops running Windows, thanks to efforts by Microsoft to make Windows on ARM work. The company convinced other companies to port their own software, and created cowtools that allow most existing programs to run on the new laptops, in emulation. Chips in these devices are made by Qualcomm, and benchmarks show that they can finally compete with Apple's M-class mobile processors, which are also based on a combination of ARM technology and a great deal of custom chip design by Apple's formidable in-house team.

Another bastion of market share and profits for Intel, the PC gaming market, is also showing early signs of erosion. Portable gaming systems like Valve's Steam Deck and the Lenovo Legion Go, which can run even very demanding games, use processors from AMD. Future devices that will be part of the company's plan to license its custom OS to other manufacturers may also use ARM-based ones.

Inherent in Intel's woes is the way its vertically integrated structure, long an asset, now weighs on the company's bottom line and ability to innovate. Unlike other companies that either design chips or manufacture them, Intel has stuck to a seemingly antiquated model of doing both.

Intel reported a $16 billion loss in its most recent quarter as it spent big to transform into a contract manufacturer—that is, a company that also manufactures chips for other companies, even competitors—and catch up to rival TSMC, which now produces the world's most cutting-edge chips.

Analysts expect Intel to return to profitability in 2025, but it won't be clear for years whether the company's big manufacturing bets will ultimately pay off.

One of the big bets of Intel's recently departed CEO Gelsinger, was Intel's attempt to leapfrog TSMC in terms of chip technology. What it calls its "18A" tech could in theory allow its own chips, and those it makes for outsiders, to once again be the most cutting-edge, and the fastest, on the planet. The company has said it could regain that title by 2026. Intel recently announced it had signed a deal with Amazon to make custom chips for the company, using its 18A technology.

Even if Intel can once again lead the industry with its technology, the best case scenario for Intel's own products is that it regains dominance in a market that continues to shrink—the x86 CPU one, says O'Laughlin. The removal of Gelsinger, who was betting on an all-in strategy for Intel to regain dominance both in the market for its own chips and in serving outside companies, suggests that Intel's board agrees that the company can't continue to count on being the best in the world at everything.

All of these challenges and conflicting priorities may push Intel to someday split in two, severing its product side from manufacturing. Intel Co-CEO David Zinsner recently said that spinning off the company's manufacturing side is an "open question."

It's also possible, in the worst case, that a fate even worse than being dismembered could be in store for Intel.

Rene Haas, CEO of ARM, recently observed that Intel has long been an innovation powerhouse, but that in chipmaking and design, there are countless companies that don't innovate fast enough—and no longer exist.