Analysis on Intel’s Expansion of its
PC Platform Strategy to Digital Home
Angie Sewon Cho
Jong Yoon (Jeff) Kim
Young Joon Suh
Analysis on Intel’s Expansion of its PC Platform Strategy to Digital Home
Angie Sewon Cho, Jong Yoon (Jeff) Kim, Young Joon Suh
1. Overview
The “Intel Inside” logo is arguably the most recognized name in the personal
computer (PC) market, even when most of the consumers do not have a clear idea of
the role and benefit of Intel microprocessors. Among the various components that
constitute a PC system, Intel only produces one component, the microprocessor, but it
has successfully positioned itself as the platform leader.
The first half of the report will explore how Intel developed and executed a
platform strategy that helped to create and support a favorable ecosystem to Intel.
Unlike Michelin who failed to diffuse its PAX system through the ecosystem, Intel
brought the intermediaries and complementors to continuously adopt Intel’s
innovative processors and deliver value to the end-users. Such seamless adoption
through the ecosystem created market demand for Intel’s new processors. The launch
of Universal Serial Bus (USB) in 1995 exemplifies Intel’s technological initiatives and
long-term partnership with its complementors.
The second part of the document will focus on reviewing Intel’s attempt to set a
new standard in the digital home market through Digital Living Network Alliance
(DLNA). It is widely believed that the advancement of technology will ultimately merge
PC, consumer electronics (CE), and mobile phone in the home. The rapid increase of IP
networking inside the home provides ample opportunities for the PC and CE
industries. 1 This means PC has evolved from being a standalone product to a
component of a larger consumer digital living network and it is natural for Intel to
establish and drive DLNA to replicate its success in the PC market. Despite such
efforts, Intel’s presence in the digital home market is minimal and Intel is not seeing
the kind of fast adoption and diffusion as in PC market. Hence, this document will
assess the cause and look at what are the future directions that Intel should pursue.
2. Platform leadership in the PC market
As the dominant player in the microprocessor market, Intel has strong
competency in technological innovation. As Gordon E. Moore, the co-founder of Intel
1
http://www.intel.com/standards/case/case_dh.htm
1
Analysis on Intel’s Expansion of its PC Platform Strategy to Digital Home
Angie Sewon Cho, Jong Yoon (Jeff) Kim, Young Joon Suh
predicted, Intel has been doubling microprocessor’s performance and halving its price
in every 18 months. 2 However, Intel quickly realized that should the end-users
purchase Intel’s microprocessor only as a part of a computer system, the value of
Intel’s increased processing power and capacity would not be delivered to the
consumers without proper co-innovation from the PC makers and software developers.
In other words, even if the processor became faster, end-users would not realize
enhanced performance if the Input/Output (I/O) bus that determines the speed of
data transmission was not improved together. In addition, the increasingly diversified
peripheral devices also slowed computing speed.
Hence, Intel’s ecosystems in the PC market can be illustrated as below:
To successfully diffuse Intel’s innovation in the PC ecosystem, Intel required
three elements. First was providing a tangible end-user benefit. Intel products should
deliver visible and tangible differences to the end-users so as to create market demand.
Second was grabbing a large market share. Since the industry was influenced by the
“network effect” in which the value of the product increases as the number of users
increases, securing a large base would provide long-term advantage. Last, but perhaps
the
most
important
aspect
was
getting
voluntary
participation
from
the
complementors and intermediaries. Given the fast evolution and diversification of the
PC industry, it was almost impossible to vertically integrate or set up a closed
innovation system with limited numbers of industry leaders.
2
http://en.wikipedia.org/wiki/Moore%27s_law
2
Analysis on Intel’s Expansion of its PC Platform Strategy to Digital Home
Angie Sewon Cho, Jong Yoon (Jeff) Kim, Young Joon Suh
What allowed Intel to be the platform leader in the PC industry was its smart
balance between direct control over new technology standards and industry-wide
collaboration to share the cost and benefit of innovation.
For Intel, it was important to configure complementary devices that are
favorable to their new microprocessors and stimulate fast transition to the new devices
through volume production and distribution. At first, when starting the PCI bus
system, Intel found out that complementors lacked the capability to produce the bus
design and performance that Intel wanted. According to an interview with Intel’s Sales
and Marketing Group manager, Intel first started providing specifications to the
complementors, but soon realized that the delivered components were not fast enough.
Given the component was critical to the processor, Intel PCI Components Division
entered the chipset business to “do it right.”3
However, it was also apparent that Intel did not have the organizational
capabilities to enter every complementary market, especially the software market.
Therefore, having the complementors voluntarily adopt Intel’s innovation was critical
to make the PCI bus sustainable and expandable. To this end, Intel had to remove the
concerns of its partners about Intel’s superior clout in the industry. Complementors
would have likely acted against setting Intel’s component as the de facto standard if
they perceived Intel was intending to dominate the complementor market through its
proprietary new technological standards and superior cost advantage.
Intel successfully addressed the issue in three steps. First, it shared intellectual
properties. Instead of taking the first mover’s advantage and charging royalties to the
complementors, Intel opened its design and technological specifications so that Intelowned business unit and external partners can compete on fair ground. Second, Intel
controlled its market price and avoided price competition to ensure smaller partners
could maintain a sustainable business. Whenever Intel entered a complementary
market, it set up a separate business unit with an independent P&L management so
that they could not cut down the cost too much. Instead of providing a one-time
subsidy, Intel indirectly subsidized the partners to join and keep their business in the
market by lowering the cost of entry and allowing sustainable profit. Third, Intel
showed long-term commitment to the new standards. The establishment of Intel
3
Annabelle Gawer, Platform Owner Entry and Innovation in Complementary Markets:Evidence from Intel
3
Analysis on Intel’s Expansion of its PC Platform Strategy to Digital Home
Angie Sewon Cho, Jong Yoon (Jeff) Kim, Young Joon Suh
Architecture Lab, a non-profit organization signaled to the market that Intel was
committed to making the new technology as a long-term industry standard. By
providing security and stability, Intel could successfully motivate partners to invest
their resources into adopting Intel’s innovation.4
3. Intel’s Entry to the Digital Home Market
Why is Intel eager to enter into digital home market?
Intel has been trying to enter the digital home market because of its significant
growth opportunities and untapped potential. In particular, Intel tried to develop a
digital home environment with an Intel based architecture and standard. Consumers
are currently consuming a huge amount of digital media through mobile, CE and PC
products. Such trend requires a home network that allows disparate devices to
interoperate seamlessly.
The digital home market has vast growth potential because consumer’s desire
in digital home has remained largely unfulfilled and the number of consumers with
broadband access, home network and digital home applications is still very small. 5
Fast transition to digital contents in consumer’s entertainment consumption pattern
makes the market more promising. The online music subscriptions and downloads
had already accounted for 10% of the $12.8 billion music industry in 2006 and one
third of music sales came from downloads in 2008.6 Approximately 370,000 motion
pictures have been made worldwide since 18907 and many of them are being digitized
so they can be easily downloaded. Consumer digital media libraries will continue to
grow. In U.S, 31% of households downloaded music and 32% downloaded snap digital
photos in 2003. These figures grew to 43 and 56 percent, respectively in 2007.8
In addition to the aforementioned new market opportunities, the key reason
that Intel tried expanding to the digital home and subsequently focused on its System-
4
Annabelle Gawer, The Organization of Platform Leadership: An Empirical Investigation of Intel’s Management
Process Aimed at Fostering Complementary Innovation by Third Parties
5
Forrester’s Consumer Technographics Q4 2003 European and Q4 2003 North American Studies
6
Forrester Research
7
UC Berkeley School of Information Management and Systems
8
Yankee Group, August 2003
4
Analysis on Intel’s Expansion of its PC Platform Strategy to Digital Home
Angie Sewon Cho, Jong Yoon (Jeff) Kim, Young Joon Suh
on-Chip (SoC) business was because the R&D cost of advanced chip manufacturing
was growing at an exponential rate while the growth of the overall PC market has been
sluggish with the exception of the low-end netbook.9 The R&D cost alone for the latest
32 nanometer circuitry is estimated at $600-900 million and Intel announced in 2009
that they will invest $7 billion over the next two years to build the next-generation
chip manufacturing plants that produce 32nm circuitry chips.10 In essence, not only
has the number of transistors that can be placed on an integrated circuit has doubled
approximately in every eighteen months as in the Moore’s Law, but the cost for the
developer has also been increasing as well. On the other hand, the demand for the PC
market has stagnated. Ranjit Atwal, research director at Gartner said in September
2010, “There is no doubt that consumer, if not business PC, demand has slowed
relative to expectations in mature markets.”11 Only the netbook segment has shown
substantial growth, albeit at the expense of cannibalizing the high-margin notebook
market. Such disturbing trend has led to the decline of the average selling price of PC
and reduced profit for the PC manufacturers. By January 2009, Windows desktop PC
average selling price (ASP) had fallen to $533 and notebooks to $602.12 In the end,
Intel correctly foresaw that they will not be able to recover their skyrocketing R&D cost
in the PC and server market alone.
Hence, Intel has long hoped to see its x86 microprocessor shift away from PC
and expand to the consumer electronics as evidenced by the VIIV platform strategy
that was announced in 2005. The plan was to take PC out of the room and place it as
the hub of the home to enable contents sharing across different devices: “The vision is
to enable customers to have access to their content, both personal – photos, home
videos – and premium – movies, music – at anytime, anywhere and on any device in
and around the home,” said Intel spokesperson Kari Skoog.13
How to build up platform strategy to expand the possibilities with connected devices
9
http://blog.naver.com/ioyou64?Redirect=Log&logNo=130077378768
http://www.reuters.com/article/idUSTRE5196WR20090210
11
http://news.cnet.com/8301-1001_3-20015275-92.html
12
http://www.eweek.com/c/a/Windows/Netbooks-Are-Destroying-the-Laptop-Market-and-Microsoft-Needs-toAct-Now-863307/
13
http://www.pcmag.com/article2/0,2817,1942273,00.asp
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5
Analysis on Intel’s Expansion of its PC Platform Strategy to Digital Home
Angie Sewon Cho, Jong Yoon (Jeff) Kim, Young Joon Suh
Intel’s vision of digital home consists of interoperable devices in the home that
are capable of sharing digital media across a network. This means consumers can use
PC to download a movie from online vendors and then play it through a DVD player or
TV, or download music and play it on the home stereo. Intel wanted to help customers
evolve a disconnected collection of devices into a digital home entertainment
experience, anchored by PCs that are based on Intel processors. Intel believed that
selling solutions for the digital home opens up business opportunities by generating
additional sales and higher margins.
To merge PC, CE and mobile technologies in the home, Intel tried to build
industry standards to achieve platform leadership, similar to its “Intel inside” strategy
in the PC market. For that, Intel led the Digital Living Network Alliance (DLNA,
formerly Digital Home Working Group) as one of the founding members and
additionally provided Intel Networked Media Product Requirements (NMPR) to
complement DLNA. Intel thought the PC and CE industries must work together to
specify open standards for digital home products, if they are to create a much larger
playing field for both industries. In that sense, DLNA presented a great opportunity to
bring key players in the PC, CE and mobile industries together to address which
standards and specifications are needed to enable digital home. The growth of the
digital home market would be limited without cross-industry standards and
specifications.14
Intel NMPR complements DLNA guidelines as below:
Since its formation in June 2003, DLNA has grown rapidly and now includes
more than 130 member companies from relevant business fields (CE, mobile and PC)
14
http://www.intel.com/standards/case/case_dh.htm
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Analysis on Intel’s Expansion of its PC Platform Strategy to Digital Home
Angie Sewon Cho, Jong Yoon (Jeff) Kim, Young Joon Suh
and on a global scale (Asia Pacific, U.S and Europe). The first set of design guidelines,
a specification of the standards that manufacturers should use to ensure
interoperability among devices was released in June 2004.
Intel’s ecosystems in digital home market can be illustrated as below:
Through DLNA, Intel led the development of guidelines for interoperability
between media codecs (technology and standards for compressing and decompressing
data). The guideline merged existing individual codec standards (for example, MPEG)
and technologies (such as Windows Media Video or WMV) to build a framework that
enables devices with different codecs to communicate amongst each other. 15
4. Evaluation of Intel platform strategy in digital home
While it is still too early to make a judgment, Intel’s attempt to expand its PC
platform leadership to the home environment so far can be considered a limited
success. On paper, Intel has seemingly achieved its objectives through DLNA: 1) Intel
has successfully engaged with key stakeholders to form a global collaboration across
PC, TV and mobile manufacturers, 2) after much work, the alliance has established a
set of interoperability standards, enabling Intel to gain a foothold in the home
environment, and 3) already more than 8,000 products has been certified by DLNA.
15
Multimedia 101, March 31, 2009, Understanding DLNA
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Analysis on Intel’s Expansion of its PC Platform Strategy to Digital Home
Angie Sewon Cho, Jong Yoon (Jeff) Kim, Young Joon Suh
Shipments of various DLNA-certified devices will surpass a billion units by 2014, up
from several hundred million in 2009. Blu-Ray Players/Recorders will ship over 85
million DLNA-certified units in 2014. The fastest growth is expected in the photo
frames category. While less than 1 million units were shipped in 2009, over 33 million
DLNA-certified digital photo frames are to be shipped in 2014.
Despite such achievements, Intel cannot be too excited about the current status.
First, consumer awareness of DLNA is low. Only 6% of In-Stat survey respondents
were very or somewhat familiar with DLNA. That means brand power like “Intel Inside”
in the PC market does not exist at all. Second, demands for DLNA-certified products
are not that high. A recent NPD survey revealed that only 15% of the American
consumers downloaded contents such as music or movies in the past three months
and most of them did so using their PCs, not other devices such as smartphones or
game consoles. Third, while new alternatives such as Apple TV and Google TV can be a
great opportunity for Intel and DLNA to cover more devices, high uncertainty in the
fast-moving market may threaten the current status of Intel. In particular, Apple's
entry to the market is a big concern to DLNA. Compared to Apple who enjoys a closed
ecosystem of its own, it is difficult to have more than 200 members agree on a single
message that resonates with the consumer. Apple's entry into this market now gives
them an end-to-end solution that looks similar with the DLNA architecture – iTunes as
the digital media server (DMS); the new Apple TV as the digital media player (DMP);
and the iPhone, iPod, and iPad as digital media renderers (DMRs) or digital media
controllers (DMCs).16
Although Intel tried to replicate its platform leadership strategy in the PC
market, there was a key difference between PC market and digital home market. Intel
found its sphere of influence to be not as powerful in the mobile and CE industry
where established players such as Sony and Nokia fought hard to preserve their
interests in the war of standardization. Furthermore, the underlying fundamental
behind Intel’s vision of the digital home ecosystem was different from the one that Intel
built in the PC industry. The PC ecosystem already had an established center of
gravity, Intel’s microprocessor and was focused on fostering the complementary to
justify Intel’s new chips to the end-users. Thus, the benefit and territory were clear
16
http://www.heycoop.com/2010/09/not-exactly-onion-dlna-responds-to.html
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Analysis on Intel’s Expansion of its PC Platform Strategy to Digital Home
Angie Sewon Cho, Jong Yoon (Jeff) Kim, Young Joon Suh
among the stakeholders; Intel sells more chips, complementors sell more peripherals
and the consumers experience a faster PC. On the other hand, Intel’s approach to the
digital home ecosystem was about trying to replace the current center of gravity with
Intel microprocessor. Consequently, while the involved players agreed on increasing
the pie size, such created unavoidable tensions with the mobile and TV industry as
they had already owned and were comfortable with their solutions. Perhaps the most
critical issue was that the relative benefit of Intel media processor was not substantial
enough for both the TV manufacturers and the end-users to accept the adoption cost.
As a result, even after having Intel’s System-on-Chip (SoC) adopted as one of the
standards in the interoperability guideline, the actual adoption of Intel media
processors among TV manufacturers has been low. Canmore (CE3100), the 90nm
Pentium M core-based SoC was a disaster and sales on the subsequent 45nm Atom
core SoC, Sodaville has been almost non-existent so far.17
Existence of a strong competitor, ARM, has been another challenge. Though a
virtual unknown to consumers, ARM is the new powerhouse in the mobile phone
arena and has been rapidly gaining market share in the mobile phone market thanks
to the explosion of the smartphone segment and its adoption of ARM core-based
processors. In 2009, ARM reported to have shipped more than 2.5 billion mobile chips.
Moreover, ARM has formed a strategic alliance with the Big Four PC manufacturers
and plans to produce chips for tablet PCs and smart books, becoming an increasing
threat to Intel.18
Intel’s recent strategic moves: Google TV and McAfee
Given the aforementioned challenges and setbacks, the future direction of Intel
should be two-fold. One is to target the tech-savvy consumers who are willing to
embrace the web experience through an Intel processor-embedded Smart TV while the
other is to seek the niche market in the connectivity market between digital devices.
Intel’s recent decision to join the Google TV alliance and purchase the world’s second
largest security company will pioneer each direction, respectively.
17
18
http://avenuel.tistory.com/775
http://jsksoft2.tistory.com/318
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Analysis on Intel’s Expansion of its PC Platform Strategy to Digital Home
Angie Sewon Cho, Jong Yoon (Jeff) Kim, Young Joon Suh
Since Intel has lagged behind the mobile phone market and ARM is actively
planning to attack Intel’s core PC market, the remaining third axis of the so-called
Three Screens, TV is the area that Intel could ill-afford to lose. Consequently, Intel has
formed a strategic alliance with Google and Sony to enter the Smart TV market. There
are high hopes and expectations on the Google TV as it marks as the first true Smart
TV. Combining Intel’s SoC prowess with the OS leadership of Google and the contents
and TV brand power of Sony, Google TV is poised to strike back at the chief rivals of
each company. Not only will Google TV allow consumers to watch hundreds of
premium channels, but also enable end-users to view streaming contents from Netflix,
Amazon VoD and YouTube and utilize applications purchased in the Android market.
Like a PC, Google TV will provide web search capabilities through the embedded
Google Chrome web browser.19 Finally, the open platform strategy that Google typically
adopts will serve to stimulate co-innovation among developers in the ecosystem.
While the hardware and software synergy created due to the alliance is expected
to make a drastic impact to the industry, Google TV is not without challenges. It
remains to be seen whether consumers are willing to change their TV consumption
behavior since the keyword that defines TV has been simplicity and ease-of-use.
Signified by the “Couch potatoes,” consumers are accustomed to the passive viewing
experience that requires no complexity. However, the TV experience changes
completely once the web is integrated. The Smart TV users may be faced with the
errors that a PC user is forced to go through and unless Google TV can demonstrate
high reliability and ease-of-use, the relative benefit of web browsing experience will
quickly be erased among the minds of TV consumers. The price is another entry
barrier, especially during the economic recession. As with Intel’s CE SoC, the initial
cost of Google TV is expected to be high and given the reservations that consumers
would have, it may end up being a fancy TV for a small segment of early adopters.
Intel’s other key strategic decision to purchase McAfee may provide another
direct and tangible benefit to Intel by allowing the company to have an additional core
element in the digital home ecosystem. Thanks to the increased consumer’s desire to
access and share contents, the number of connected devices is expected to grow from
19
http://blog.naver.com/dopanysmith?Redirect=Log&logNo=150086732371
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Analysis on Intel’s Expansion of its PC Platform Strategy to Digital Home
Angie Sewon Cho, Jong Yoon (Jeff) Kim, Young Joon Suh
1 billion to 50 billion by 2020.20 Consequently, security will become an increasingly
relevant and important issue as more people share personal and sensitive contents
across different digital devices. Since DLNA has essentially paved a new security
market in which the TV and mobile phone manufacturers have little competency, Intel
could make an early strike and offer a differentiating platform that vertically integrates
security solutions at both the hardware and software level. At best, Intel would be able
to extend its presence in the consumer electronics and sell more of its SoC to
manufacturers. Even at its worst, Intel would continue to evolve from being a
manufacturer to a computing company and provide security measures in the
connectivity market. It is thus no coincidence that Intel has elevated the priority of
security to be on par with its strategic focus areas in energy-efficient performance and
Internet connectivity and recently made the $7.7 billion acquisition of McAfee, the
world’s second largest computer security company behind Symantec.21
5. Concluding Remarks
Intel has made shrewd executions in the past to successfully elevate itself as
the leading chip maker in the PC ecosystem. Realizing the increased cost in its core
market and the new opportunities, Intel has attempted to expand its platform
leadership to the mobile and CE space. However, given the different nature of the
ecosystem that Intel tried to build, Intel’s efforts can be defined by the success of
establishing interoperability standards through DLNA and the failure to translate such
results to commercial success. The complexity in establishing and benefiting from an
ecosystem that spans across different industries has Intel seeking to expand its
presence in the CE space through the Google TV and focusing on a new market that
stemmed from Intel’s attempt to establish connectivity among digital devices, the
security market. The next few years will dictate whether Intel can take the next step
and become a true industry leader or succumb to being a mere chip manufacturer.
20
21
http://www.mcafee.com/us/about/intel_mcafee.html
http://newsroom.intel.com/community/intel_newsroom/blog/2010/08/19/intel-to-acquire-mcafee
11