As chipmakers Intel, Advanced Micro Devices and Nvidia face an existential crisis as their most prominent customers begin exploring producing their own semiconductor hardware, WSJ reports.
Why It Matters: The chip industry has long been ruled by “big manufacturers and design houses.” But now, Amazon, Microsoft and Google are realizing the benefits of making their own chips “tailored to the supercharged areas of cloud computing and artificial intelligence.” It’s a trend that could shift the balance of power in the industry, forcing legacy chipmakers to adapt their own businesses to major customers further.
The pandemic has sped up the rise of cloud computing. Companies have had to embrace digital tools as remote work becomes an increasingly popular trend. Amazon, Microsoft and Google have all seen “strong growth in the cloud during the remote-work period.”
- With more customer data accumulating, businesses are also showing “an increased appetite” for artificial intelligence tools to make sense of the raw findings.
The Key Players:
- Amazon announced a new chip this month that “promises to speed up how algorithms that use artificial intelligence learn from data.” In the past, it produced other processors for its cloud business Amazon Web Services.
- Google has been moving on AI processors for years after releasing one in 2016, updating the tech several times.
- Microsoft has the No. 2 cloud business, behind Amazon, but has allocated resources to chip design, including a “programmable chip to handle AI and another that enhances security.” Bloomberg News also reported Microsoft is working on a central processor.
The semiconductor industry has generally been driven by Moore’s Law, which says the number of transistors in a circuit will steadily improve every 18-24 months. But the principle is losing relevance, and companies are searching for more intuitive ways to “eke out better performance, not always measured in speed, but sometimes lower power consumption or heat generation.”
- The size of the cloud is an inherent obstacle for legacy chip companies. In the past, they produced one-size fits all products and let customers adapt them. Now, the largest customers have financial resources to push for optimized and efficient designs.
The Bottom Line: Legacy chipmakers haven’t lost much ground so far. Even if Big Tech has momentum on bringing these operations in-house, it will take time for the trend to grip the broader industry.
I would imagine it won’t be an easy fight to dethrone Intel ($INTC), NVIDIA ($NVDA), or AMD ($AMD) in the chip game, but Apple ($AAPL), Amazon ($AMZN), Microsoft ($MSFT), and Alphabet ($GOOG) have vastly more resources and distribution advantages.
For example, if Apple or Microsoft get their chips “good enough”, they can simply prioritize their chips in their computers and servers. The same goes with Amazon and Alphabet’s devices and cloud services.
ROIC members know who’s side I would rather be on, with $AMZN and $MSFT being on the Big Board. Also, Intel ($INTC) is looking increasingly like a value trap.