One cloud company after another is developing its own chips for its servers – and is eating away at the sales of the major processor manufacturers.
(Photo: DigitalVision/Getty Images)
Munich, San Francisco “Only the paranoid survive” is how Andrew S. Grove called his legendary 1996 book. The message from the co-founder and longtime boss of the chip manufacturer Intel: only those who are constantly on the alert can recognize threats in good time and react to them. Because it is only a matter of time before something serious changes in business life.
Grove’s mantra has been internalized by Intel’s C-suite. Only: The management of the world’s largest semiconductor manufacturer has not yet found a recipe against the large-scale attack by its major customers.
The situation is threatening: one cloud company after another is developing its own chips for its servers – and is gnawing at the sales of the large processor manufacturers, i.e. Intel and its competitors AMD and Nvidia. Processors are the brain of every computer.
The latest attack by chip customers: Microsoft has hired a well-known semiconductor expert in Mike Filippo. Observers assume that the engineer should resolutely push the processor development for the US group’s cloud offerings.
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Chips developed in-house have many advantages for the cloud providers Amazon, Google and Microsoft. On the one hand, specialized chips can perform certain tasks, such as artificial intelligence (AI) applications, faster and more efficiently than the products of the chip suppliers, which are often all-rounders. On the other hand, they offer the opportunity to set oneself apart from the competition – and that goes beyond the pure software level.
Amazon sees artificial intelligence as an accelerator
From the point of view of Amazon’s head of technology Werner Vogels, the trend towards self-developed semiconductors is closely related to the spread of AI. “Many of the processors that we see today would not have been possible eight or nine years ago,” he told the Handelsblatt at the Reinvent developer conference in Las Vegas a few weeks ago, on the occasion of the presentation of the new Amazon chip Graviton 3.
At that time, advances in graphics chips, so-called GPUs, in particular, led to applications for machine learning becoming widely usable. The US company Nvidia is the leader in this area.
“However, some applications have become relatively expensive, which is why it is worth developing specialized semiconductors,” said Vogels. That’s why Amazon’s cloud subsidiary AWS now has various chip variants in its range that have been optimized for faster processing or for memory-intensive applications.
Intel, AMD and Nvidia now have to worry about important sources of revenue. In the first nine months of 2021, industry leader Intel generated a good 30 percent of sales and around 36 percent of operating profit with server chips. At AMD, the business with network computers recently even accounted for more than 40 percent of revenues and about half of operating profits.
The two company leaders formed the legendary “Wintel” alliance.
(Photo: Reuters)
Microsoft is keeping a low profile regarding its chip plans. In the future, however, the software company is likely to increasingly rely on self-developed server chips for its cloud subsidiary. Newcomer Filippo was already instrumental in making the iPhone manufacturer less dependent on chip suppliers at his previous employer Apple.
It is no coincidence that Filippo used to work for the chip developer ARM for a long time. Almost all in-house developments that server operators such as Amazon, Google or the Facebook parent company Meta Platforms have promoted in recent years are based on the technology of the British semiconductor designer. The technology is also used in smartphones because it is considered to be particularly energy-efficient.
Microsoft, on the other hand, has so far mainly used chips from Intel, which, like those of its competitor AMD, are based on the so-called x86 architecture.
Competition for Intel also in PCs
Meanwhile, the chip companies don’t just have to tremble about sales with servers. It cannot be ruled out that one day Microsoft will also replace the suppliers in its notebooks. The trend towards self-developed chips does not stop at PCs and laptops.
Apple has been replacing third-party chips in its products with in-house developments for years. Only in October did the brand celebrate its new Macbook Pro, in which the Intel chip of the previous model was downright outclassed by its own component during the presentation.
For a long time, the “Wintel” duo of Intel and Microsoft dominated the computer industry. Whenever Intel brought a new processor onto the market, Microsoft made sure with its Windows software that it quickly reached its limits and a more powerful chip was needed. That’s how corporations made billions. The liaison was once initiated by Intel’s father Andrew Grove and Microsoft founder Bill Gates. But the old alliances have become obsolete.
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