Why Intel Will Be a Mobile Loser

Intel, as it’s wont to do, overnight made a splashy unveiling of a new family of processors: the Atom Z6xx series, whose chips are much more powerful than current versions but consume less power. Why the hoopla? Apparently these chips, which run at over 1.5 GHz, can be used to power not only smartphones but also tablets.

So as I usually do when a public company announces major news, I checked Intel’s stock price in pre-market trading: largely unchanged from its closing price the day before. If this was supposed to be such a big deal, why was the market ignoring it, and responding by shrugging its proverbial shoulders? Here’s why.

Future Shock

It reminded me of a piece of wisdom imparted to me by a friend of mine, a veteran of Wall Street. He says that investors pay for growth, and that anytime they express apathy towards a growth stock, they are pointing to a company’s inability to find new markets.   On the other hand, if they’re willing to overvalue a stock, then they believe that company is going to find newer markets to keep growing its revenues. Google and Apple fall into that category.

Intel’s stock performance over five years, as this chart shows, has been mostly flat to down. Much like Microsoft. Just as they have always been, the fates of the Wintel duopoly are still pretty intertwined. From the looks of it, both companies are going nowhere fast. Which is amazing considering that both companies still have a monopolistic control over the personal computer ecosystem.

Former Apple executive Jean-Louis Gassee, in a recent blog post titled “Very Personal Computing,” wrote:

The personal computer has reached the S-Curve’s shoulder while very personal computers are still at the S-Curve’s knee, poised for the type of growth the PC has enjoyed over the past 30 years…Apple, Google, and now HP have seen the past and the future: The PC business is mature and graying; the growth is with the new very personal computers. Relying on Microsoft (or even Google, unless you’re Google) for the operating system puts you in a fast race to the bottom, to meager margins, to having key decisions for your business made in Redmond or Mountain View.

The market has read the tea leaves as well, thus explaining the stock performance of Microsoft. Same goes for Intel. Despite its efforts to launch new chips or dabble in likely-to-fail OS efforts such as its joint venture with Nokia, the Mobilin, Intel resembles an elephant on top of quicksand.

Take its Atom Z6xx series announcement, for example. From a short-term tactical perspective, it will be months before these chips actually show up in phones on store shelves. It will be months before one of those phones gets any kind of traction, volume-wise. As for tablets — now even an optimist knows that would be a tough market to crack. In other words, don’t expect these new chips to have an impact on Intel’s bottom line anytime soon.

Mobile Chip Competition

Take a step back, and it becomes very clear that the company is facing competition from deep-pocketed, well-entrenched competitors — and they’re no pushovers. Because it had a monopoly on PC chips, and faced feeble competition in the x86 world, Intel managed to put its rivals out of business and maintain very fat margins, making it one of the most beloved stocks of the 1990s. Thanks to its overflowing coffers, it also experimented with different markets — networking and ultra-mobile processors (such as XScale) — by buying a lot of companies. All these attempts to expand beyond PCs and servers were schizophrenic at best.

Why? Because it couldn’t reconcile the future with these lower-margin products. As a company, Intel is addicted to the margins it gets from the PC and server markets. It needs those margins to keep its money machine going. But these are slow-growing markets. To wit, its own low-cost Atom processors are cannibalizing the core PC market, thanks to the growing popularity of netbooks at laptop replacements.

Anand Chandrashekhar, Intel’s senior VP and general manager of the Ultra Mobility Group, said: “Intel has delivered its first product that is opening the door for Intel Architecture (IA) in the smartphone market segment.” That is a shocking statement, and one that shows Intel’s long road ahead.

It’s an ARM’s (Mobile) World

IA is making its debut at a time when its rivals are firing on all cylinders. The ARM-based mobile application processor ecosystem is as crowded and vibrant as an Asian bazaar. From Qualcomm’s Snapdragon to Nvidia’s Tegra to Texas Instruments’ OMAP, the smartphone and tablet markets are very competitive. ARM-based chips are faster and consume a lot less energy. It will be at least a year before Intel can match them in the power department, analysts say.

Unlike in the PC market, where Intel’s best competitor was an anemic AMD, its mobile industry rivals are pretty cash-rich. And none is stronger than Qualcomm, which in many ways is a proxy on the fast-growing Android smartphone market. Qualcomm at the start of this century was quite aware it was losing its CDMA dominance and as a result started looking at new markets, so now it has a major head start over pretty much all its rivals.

The company has a minority stake in HTC, one of the largest smartphone makers in the world. It’s also been a major power player in the Android ecosystem and has very close relations with Google. More importantly, Qualcomm knows how to integrate application processors with mobile radios, thanks to a lot of in-house intellectual property and expertise — something Intel sorely lacks.

If Qualcomm is a fearsome competitor in the Android ecosystem, Intel is locked out of the Apple ecosystem. Apple has bet the farm on its internal chip technologies such as the ARM-based A4 currently being used inside the iPad. In the iPhone, ARM is the architecture of choice as well. Microsoft has started working closely with Nvidia’s Tegra and RIM’s devices, too, are ARM-based. Last month Hewlett-Packard agreed to buy Palm in a deal valued at $1.2 billion, and with that its own OS that runs on ARM — not Intel-based — chips.

History Repeating Itself

Many of us focus too much on the here and now, forgetting the lessons of history. Back in the day, IBM and Digital Equipment tried very hard to compete with PowerPC and Alpha chips, but couldn’t make a go of it against Intel’s dominant x86 platform. They failed because they were trying to reinvent the wheel.

The mobile ecosystem is pretty much the same — trying to go against the ARM ecosystem is trying to reinvent the wheel. ABI Research says that ARM-based ultra-mobile devices will surpass x86-based devices by 2013 because, as Stacey wrote, “ARM has always had an advantage in mobile because the chips based on the instruction set were designed to sip power rather than glug it. That translates into a longer battery life and presumably a smaller form factor for the battery and end device.”

Ashok Kumar, analyst with Rodman & Renshaw, put it best when he said:

They’ve publicly said that only in the next version of Atom–which is a 2011 event–will power consumption be low enough to truly address the smartphone market. That’s been the official positioning so I don’t know what’s changed. In terms of actually making a push into the ARM market, that’s likely to be a 2011 event.

To put it bluntly, it won’t be until next year that Intel will have a competitive offering on the market — an eternity in the mobile world. Too bad Intel sold its StrongARM technology to Marvell.

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