In October, I wrote about the seven reasons Intel could be the next RIM, the beleaguered maker of the Blackberry smartphone. Judging by the amount of traffic that post got from behind Intel’s own walled corporate intranet, it was a post many at Intel itself took seriously.
But little has changed in the past three months, and the company’s just-released fourth quarter earnings report reveals exactly the same weaknesses I outlined then.
The key number from Intel’s fourth quarter report: Revenue, at $2.5 billion, is down 27% from fourth quarter a year ago, when it was $3.4 billion.
What’s going on? Intel CEO Paul Otellini says the company “continued to execute through a challenging environment,” by which he means a general decline in sales of PCs, long the company’s bread and butter. Even the launch of a new version of Windows, which usually spurs consumers to upgrade their PCs, did nothing to stem that decline.
It’s by now dogmatic that people are buying tablets instead of PCs to fulfill their everyday computing needs. One in four computers is now a tablet, and in 2013 they will outsell notebook computers worldwide for the first time ever.
Intel’s core problem is that it is persona non grata in the field of power-sipping, relatively inexpensive microprocessors that power mobile devices like phones, tablets and, increasingly, notebook computers. As I outlined in October, Intel has only 0.2% of the market for chips for mobile devices. Indeed, revenue for the portion of Intel that creates chips for mobile devices is moving in the wrong direction—down 7% from a year ago, to $1 billion. (Intel calls this the “Other Intel Architecture Group.”)
The bright spot in Intel’s quarterly report was revenue for its Data Center Group, up 7% to $2.8 billion from a year ago. This group creates the fast chips that power the servers that run “the cloud”—or in other words, the internet. It makes sense that this group should be doing well, since one of the the secrets of the ascent of mobile devices is that they can get by with slower processors and less memory because they offload a lot of their data crunching to the cloud.
Now that PCs have been redefined by consumers as “those things on which I answer email and check Facebook,” and are therefore a category that includes tablets and possibly even phones, Intel has a dilemma. The chips that power mobile devices are significantly less expensive than the microprocessors that go into notebook and desktop PCs, and makers of these chips therefore make much lower margins. If Intel tries to gain market share in this transformed landscape, it probably can’t claw its way back to its old revenue numbers without selling even more chips than it ever has before.
That said, there is a product in Intel’s pipeline that could end the company’s contraction, if mobile device manufacturers adopt it: A line of low-power chips for phones and tablets called Clover Trail. Early tests of Clover Trail chips indicate that they are as good or better than the processors that dominate this market, which are made by a variety of manufacturers (the biggest being Qualcomm) and are based on specifications created by chip design firm ARM.
There are many unknowns in Intel’s battle with ARM, including whether manufacturers will adopt Intel’s chips, the rate at which mobile software coded to run on ARM chips will be modified to run on Intel’s, and whether, ultimately, Intel’s innovation-centric, capital-intensive business model can compete with a small army of smaller but more nimble competitors.