Microsoft Corporation (MSFT) reportedly is developing its own semiconductor chips for use in the servers that support its Azure cloud computing service, as well as to power its Surface line of personal computers (PCs). This news comes just over a month after Apple Inc. (AAPL) announced that new models of its MacBook Air, 13-inch MacBook Pro, and Mac mini will be manufactured with its own internally developed M1 chip. It represents another blow to Intel Corporation (INTC), which has been a major supplier to both companies.

  • Microsoft is reportedly developing its own semiconductor chips.
  • The primary use will probably be in its Azure cloud computing service, while a secondary use for separate designs likely will be in Surface PCs.
  • Intel stands to be a big loser from this effort.
  • Custom chips from Advanced Micro Devices, Inc. (AMD) and QUALCOMM Incorporated (QCOM) are already in Surface PCs.

Microsoft's Chip Design Effort

The chip design unit at Microsoft reports to the head of its Azure cloud computing division, fueling speculation that this will be the primary use for these chips. While a separate set of internally designed chips eventually may be used in Microsoft's Surface PCs, Azure represents a much larger source of revenue for the company and thus is likely to be the priority for the chip making unit.

Microsoft has increased its hiring of microprocessor engineers in recent years, reportedly hiring talent away from major semiconductor companies such as Intel, Advanced Micro Devices, and NVIDIA Corporation (NVDA) while also scooping up engineers who became redundant at QUALCOMM when that company exited the market for server chips. Microsoft reportedly is using designs by Arm Limited, although both companies have declined to offer details.

"Because silicon is a foundational building block for technology, we're continuing to invest in our own capabilities in areas like design, manufacturing, and tools, while also fostering and strengthening partnerships with a wide range of chip providers," Microsoft communications chief Frank X. Shaw has stated. 

Significance for Investors

Key competitors of Microsoft in the market for cloud computing services also are pursuing efforts to design and manufacture their own chips, most notably Amazon.com, Inc. (AMZN). They believe that internally developed, custom-designed chips are better suited to their needs and will deliver better performance at lower cost than the more generic semiconductors offered by manufacturers such as Intel.

Moreover, as cloud computing grows, the data centers that support it are ringing up large, and growing, electric bills. Part of the attraction with Arm-based designs is that they are often more energy efficient than alternative chip architectures. In 2019, Amazon Web Services (AWS), the cloud computing division of Amazon.com, began using its own Arm-based Graviton2 processors.

Microsoft already has begun reducing dependence on Intel processors with respect to its Surface PCs. The Surface Laptop 3 and Surface Pro X use custom-designed chips, co-engineered with Microsoft, manufactured by AMD and QUALCOMM.

Apple anticipates that using its own M1 chips in its Mac computers will give it more freedom over their design, development, and launch cycle, while also allowing the company to fine-tune the performance and features of the Mac. Microsoft probably expects the same benefits from moving to its own custom-designed chips in Surface PCs.