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Intel bails on agreement with TSMC - what does it mean?

I came across an interesting little item on Intel today. The company, a fierce competitor and usually successful in attaining its objectives, seems to have taken a misstep.

Last week Intel Corp. (INTC) acknowledged that it has no immediate plans to bring to market any Atom chips manufactured by Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC). This confirmed a report that the partnership announced by the two companies last year has hit a stumbling block.

When it was announced, the partnership was a first for Intel, which had never before allowed outsourcing of it's core microprocessor technology. The objective of the partnership was to make it easier for other companies to integrate Intel's Atom microprocessor core into so-called "system on a chip" semiconductors. This would provide another channel for Intel to sell into the embedded, mobile and handheld device markets where integration of functions, small footprints and low power consumption are paramount considerations.

Intel spokesperson Bill Kircos said "It's been difficult to find the sweet spot of product, engineering, IP and customer demand to go into production." In other words, no one is beating down the doors to use the Atom chip in devices other than netbooks.

The failure to get Atom products into production at TSMC appears to signal slower-than-expected progress on execution of Intel's strategy to grow revenue outside of the PC market, where its microprocessors dominate.

Last year the company took a series of actions seen as gearing up for a broader move into new markets by pushing its x86 architecture deeper into the embedded market and elsewhere. These moves included the TSMC deal and the acquisition of embedded software specialist Wind River Systems Inc.

What this means for Intel and TSMC --

Is this a big deal for Intel or TSMC? Not really. Both of these companies are so big this partnership was just a sideshow. It does, however, show how hard it is, even for the premier microprocessor company in the world, to break into new markets. ARM Holdings (ARMH) and MIPS Technologies (MIPS) continue to dominate the market for handheld devices with their low power, customizable, RISC processors. For example, companies that are currently or formerly ARM licensees include Alcatel, Apple Inc., Atmel, Broadcom, Cirrus Logic, Digital Equipment Corporation, Freescale, Intel themselves (through DEC), LG, Marvell Technology Group, NEC, NVIDIA, NXP (previously Philips), Oki, Qualcomm, Samsung, Sharp, ST Microelectronics, Symbios Logic, Texas Instruments, VLSI Technology, Yamaha and ZiiLABS. That's a pretty serious list of customers. Once committed to a processor solution, it's not so easy to switch. Not only are new hardware designs required but all the software needs to be rewritten, too.

So Intel faces some disappointment in the near term but the company has deep pockets and can afford to maintain a long time horizon. And it looks like it will require a long term approach and a willingness to chip away at the market for smaller, handheld devices. The company has managed to build a good sized business in other kinds of markets like medical imaging systems and industrial controllers so we know that the company has the ability to diversify beyond PCs. We'll see if they have the perseverance to break into cellphones, digital cameras and other markets of this kind, as well. In the meantime, they've got a little egg on their face.

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