Intel $INTC is about to do something that would have seemed crazy under previous CEOs: the company will start competing at the lowest end of the microprocessor market. This is a company that built its reputation, and its manufacturing infrastructure—hugely expensive and unique among makers of microprocessors—on the back of high margins built into costly microchips intended for powerful PCs and servers. Now the shrinking PC market has forced Intel to attempt to create small, power-efficient, and relatively inexpensive chips to power the mobile phones and tablets that are directly cannibalizing the market for PCs.
The most surprising and extreme example of this fundamental shift in strategy was new Intel CEO Brian Krzanich’s recent declaration that Intel chips will be inside tablet computers that cost less than $100—to arrive by the US holiday season. This was apparently such an important announcement that Krzanich said it a second time, after his first declaration failed to elicit applause from the audience at the Intel Developer Forum.
Creating a usable tablet that costs less than $100 is not an easy thing to do. In Shenzhen, China, no-name manufacturers churn out Android tablets at that price point, but they have yet to make much of an impact in western markets, on account of their poor performance compared to more expensive, but more usable, alternatives like Google $GOOGL’s Nexus 7 and the iPad mini. I’ve tried ultra-cheap tablets aimed at emerging markets, like India’s Aakash 2, and while they’re just barely usable for basic tasks like browsing the web, they are not the sort of thing most consumers would pay money for, even in India, where the Aakash 2 is already being superseded by the much more powerful Aakash 4. (Where the Aakash 3 went is anyone’s guess.)
Suneet Tuli, CEO of Datawind, maker of the Aakash 2 tablet, says that the company’s next generation tablet will sell for around the same price point, or $50, “so there’s no reason Intel can’t get below $99.”
But one reason that China’s and India’s ultra-cheap tablets cost so little is that the processors inside them cost as little as $3 to $5, says Tuli. Intel’s newer mobile chips, on the other hand, can cost as much as $60. For a manufacturer to create a $99 tablet, where much of the cost is in the touchscreen display, they’re probably going to have to use an older and cheaper Intel chip, perhaps the same one to make Motorola’s Razr i, which came out in October 2012 and was the first Android smartphone to be powered by an Intel chip.
What will a sub-$100 tablet from Intel look like? It would probably be a 7-inch tablet with relatively modest specifications, but that doesn’t mean it wouldn’t be, for most consumers, more than good enough. And once a low-end tablet satisfies the average consumer’s need for modest tasks like watching videos, browsing the web, and communications, it has the potential to both satisfy a large portion of the market and also make tablets accessible to an ever-wider segment of the global population.
Datawind’s Tuli uses the slide below to explain how cheap tablets will disrupt the market for more expensive tablets, and potentially other types of personal computing devices, like laptops. “I think [Intel’s move] is the classical example of bridging the performance gap between low- and high-end products, where the increasing performance at the low-end of the market starts putting pressure on the higher end of the market,” says Tuli, referring to Clayton Christensen’s Innovator’s Dilemma.
If Intel is selling $20-$30 microprocessors for cheap tablets, that’s a far cry from the expensive, high- margin chips on which its business was built. And yet, since the company currently has almost no presence in the mobile market, anything it can sell in this market represents untapped revenue for Intel. The company seems to have finally realized that it is facing a classic instance of the Innovator’s Dilemma—as its traditional PC business is disrupted by less-expensive competitors, Intel must get into that market. The results could further devastate PC sales, but Intel has no choice—tablets, smartphones and laptops running on processors from its arch-nemesis ARM are already taking over personal computing.
