Intel/Infineon: How Google Can Match Apple in Smartphone Chips

(MoneyWatch)  When it comes to smartphones, being fast, small, and light is key -- not just for the handset itself, but the components. It's one advantage Apple (AAPL) has begun to build for itself with its semi-custom A4 chip that works fast at lower power consumption. Apple also keeps improving the advantage with placing multiple semiconductor components on a single substrate, eliminating the need for a printed circuit board. The chip, and ability to manage the trade-offs between capabilities and power consumption, has been a decided advantage over Google (GOOG), which depends on a number of competing hardware manufacturers that each wants to stand out.

But the Intel (INTC) acquisition of Infineon's wireless unit has probably changed the balance. The move allows Intel to add an piece of the mobile puzzle that it never had before. Given its expertise in advanced semiconductor construction, the company could create a single package that would offer most of what handset manufacturers need to catch up to the iPhone, at least in terms of size and power, and still be compatible with the Android operating system.

It's not that Intel has ignored the handset market, but the Atom has required too much power to effectively woo vendors. ARM Holdings (ARMH) has had a fairly unassailable position with about 85 percent market share. Even Microsoft (ARM) has licensed ARM's technology. The Infineon acquisition does a couple of things for Intel.

As Jon Stokes at Ars Technica notes, mobile devices need application processing and baseband processing -- the phone's equivalent of the CPU with graphics, signal processing, and other necessary activity, and the radio hardware to connect to a wireless network. (I'd add power management as a third critical part.) With the acquisition, Intel now has all the major parts it needs, so it could offer bundled packages and potentially make itself economically attractive to handset vendors.

Furthermore, Intel is a leader in small chip geometries, which means it can put more stuff onto chips and get more chips out of a piece of silicon. Chips offer more functions; the combination of functions use less power, which is critical in mobile; and the price can come down over time. For an industry that counts fractions of a cent in cost, this could be major. In fact, Intel CEO Paul Otellini mentioned the importance of integration in an interview:

The key thing is the technology they have today, the customer connections they have today, and where the technology in general is going. We look forward to a period in the not so distant future where all of these functions can be on a single chip. Intel has great capabilities and applications processors today, but bringing in the capabilities for 3G and ultimately LTE (Long-term Evolution) onto the chip, that makes a lot of sense to us from an economic and power standpoint.

To top it off, Apple, which uses Infineon chips, is now a client. But there's still a long way between owning a wireless chip business and getting away from Intel's dependence on PCs and servers by getting Android handset manufacturers to sign on.

Related:

• Intel Woes and HP-Dell Wars Show the March of the Dinosaurs
• Intel's McAfee Acquisition: A Semi-Desperate Bid for Competitive Advantage
• Intel Gets the Antitrust Silicon Slab Slam by the FTC
• Microsoft Licenses ARM Architecture and Rocks the High Tech Industry
• Intel Earnings a Hit, but No Time for High Tech To Relax

Chip image: Courtesy Infineon. Editing: Erik Sherman.