From an extended feature in The Atlantic:

Even Otellini betrayed a profound sense of disappointment over a decision he made about a then-unreleased product that became the iPhone. Shortly after winning Apple’s Mac business, he decided against doing what it took to be the chip in Apple’s paradigm-shifting product.

“We ended up not winning it or passing on it, depending on how you want to view it. And the world would have been a lot different if we’d done it,” Otellini told me in a two-hour conversation during his last month at Intel. “The thing you have to remember is that this was before the iPhone was introduced and no one knew what the iPhone would do… At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.”

This was certainly the XScale, which is ARM-based. There is no way an x86 chip could have fit in an iPhone (and there remains no way today).

The issue facing Otellini wasn’t just cost; rather, Intel saw themselves as a chip design company, and that meant their focus was on x86, the instruction set architecture (ISA) they invented. ARM was licensed, and that just didn’t fit with Intel’s image of themselves (they proceeded to sell XScale in 2006).

A few weeks ago, I wrote that Intel needed to change their identity:

It is into a climate of doom and gloom that Krzanich is taking over as CEO. And, in what will be a highly emotional yet increasingly obvious decision, he ought to commit Intel to the chip manufacturing business, i.e. manufacturing chips according to other companies’ designs. Intel is already the best microprocessor manufacturing company in the world. They need to accept and embrace their destiny.

Otellini is right. What a different world it would be had Intel followed this advice back in 2006.