First the fort, then the treasure

What is the secret of Intel’s margins? What is the moat? Are there layers to it?

• Is it the wonderful sales and marketing engine?
• Is it the Intel Inside Program that aligns the objectives of the PC Brands to that of Intel?
• Is it the brand that exudes future and trust?
• Is it the fantastic teams of thousands of the brightest, who design processors years in advance?
• Is it the symbiotic relationship with Microsoft?
• Is it the legendary manufacturing prowess?
• Is it.. Is it x86?

It is a fort which has many layers. All of the above in fact.

But what is the layer that allowed Intel to build all the other layers? Bingo. It is x86 becoming the de-facto standard of modern computing.  Only two companies have access to it. Intel, the owner of the Intellectual Property, AMD the only licensee – the second source for IBM, when IBM was in the business.

The sequence of this positive spiral, so fantastically envisioned and ably guided by Andy Grove and other greats, could have been as follows:

• IBM had the vantage position to establish the new standard of computing – for in the 80s no one ever got fired for buying an IBM.
• Since the IBM PC standard was made open, many other computing vendors just followed IBM’s standard. The IBM PC and hence the x86 became the de-facto standard for computing. Intel the memory vendor of the 70’s, came to own the standard that they invented for IBM.
• That gave Intel the volumes to build those fabulous, cutting edge factories or foundries or fabs to make microprocessors.
• That in turn made Intel the best and largest semi-conductor manufacturer (Tick)
• That gave the cash flow required to deploy the brightest engineers in town to maintain the project rhythm (Tock)
• That built the marriage of convenience and opportunity with Microsoft that helped the teaming duo bootstrap each other
• Which gave Intel the margins required for the Intel Inside Program – to be bold enough to be the most dominant brand in the computing space, yet be an ‘ingredient’.
• That brought in more sales.
• This gave them the moolah to invest in next generation fabs to take it up one step up. And remember, no one else could follow their steps. No one had the volumes or the vision.
• The positive spiral continued. This perpetrated Intel’s position as the de-facto standard of computing

What is CISC and how did x86 emerge?

Assume you are a drill sergeant. You have your team at (0,0). You have to march the team to (10, 10) say. You could say,

“Forward March, Left, Right, Left, Right, Left, Right, Left, Right… (10 times)

Right Turn

Forward March, Left, Right, Left, Right, Left, Right, Left, Right, (10 times) Stop”

Or you could say, assuming a higher IQ in your cadets,

“All march to ten, ten”.

In the first case, the cadets will reach there, irrespective of their understanding. The instructions are simple – Right, Left, Right Turn, Stop. But in the second case, depending on the IQ level of the cadets, they might or might not reach the place.

The first case is ‘Reduced Instruction Set Computing’ – it is simple and it depends on how well you write the software to navigate the cadet to the right place. You can take them across the sides or on the diagonal. It depends on your software.

In the second case, the cadets will need to draw upon the ‘wiring’ of their brain. Because the cadet’s brain is equipped with specific ‘wiring’ [Ten is English language wiring] , the cadet is able to reach there. It is a case of ‘Complex Instruction Set Computing’.

Intel’s CPU is an example of ‘Complex Instruction Set Computing’. The processor inside chunks up the instructions and reduces the number of instructions in the program. The job of the ‘drill sergeant’ or the ‘software developer’ is easier as the CPU can chunk up work.

x86 is one such version of CISC, the most popular out there.

The origins of two profit machines:

Now, if you are a software company developing “Word Perfect” or “Lotus 123” which language will you rather be talking?

Source: Wikipedia

It is the language from the market leader IBM. The Goliath of computing in the mid-70s established and standardised the IBM Personal Computer. Anyone can follow the standards and make their own personal computers. The giant didn’t just care.

The brain of that computer was wired up with x86 CISC instruction set. That brain was made in Intel, the language was Intel’s intellectual property.

So, your software will be compiled for x86 CISC. The other software vendor, your competitor next door will target the same market, because that has the maximum potential to grow. So, there will be more software with Intel’s instruction set (x86). So, there will be more computers with x86. So, there will be more software. So, there will be more computers x86.

Now, the x86 CISC processor ran on another vendor’s operating system called Microsoft DOS. If you write an application on MS DOS, it will easily get compiled for x86 CISC. And for no other version of RISC or CISC. It was all very convenient to the developers – they didn’t need to bother with different application porting.

It is this positive loop that will establish the Wintel hegemony.

Driven by the WFH trend and continuing build of the cloud infrastructure, Intel recorded an impressive +8% yoy revenue on the PC Business and +11% on the server business (’20 vs. ’19). The fourth quarter results were of concern with the server revenues down 16%.

As a result of these competitive advantages, Intel enjoys 58.6%+ gross margin on a business base of $77.9B. In 2020, it generated $35.4B cash from operations.

Well we all know it started off at ’78. How long can a competitive advantage last?

Along the way, did they vanquish and subjugate other kingdoms in the neighbourhood? Read on to know more.

Written in Rosetta Stone #3: An empire is formed by winning other fiefdoms