Intel's mobile transition struggles are Microsoft's advantage

As Intel continues developing high-quality PC components, Microsoft might be able to get Windows 8 off the ground.

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Intel fared better than the rest of the PC industry in the first quarter of this year. Reporting its Q1 2013 performance, Intel’s revenues and profits were roughly in line with financial industry analysts’ expectations. The company reported just a 6% drop in PC processor revenues, compared to the industry-wide 13.9% decline in shipments recently reported by IDC . Overall, quarterly revenues declined by $900 Million. Intel is banking on a return to growth in the second half of the year, from double-digit growth in its data center business and ramping shipments of Haswell-powered ultra-mobile form-factors: Ultrabooks, convertibles and tablets.

But the lag time between Intel’s design wins with device manufacturers and shipments is significant. Tablet shipments doubled and are expected to double again next quarter, but Intel hinted that tablet volumes would not grow materially until the fourth quarter when Intel Bay Trail processor-powered tablets reach stores for the holidays. Smartphones will have to wait for 2014, as indicated by SVP and CFO Stacy Smith:

"The short answer is, smartphones, it doesn't move the needle for us from a revenue standpoint as we've said; we're in the design win phase there."

Intel is clearly focused on transitioning into other lines of business, but will not abandon a PC business that is forecasted to grow nominally by IDC. One line of business in which it is investing heavily is fast, power-efficient and inexpensive processors targeted at mobile devices, such as smartphones, tablets, embedded devices and automotive applications. Emphasizing this, Intel’s retiring CEO Paul Otellini said:

"Roughly half of our spending is focused on System-on-Chip."

But for the time being, Intel’s transitional challenges are Microsoft’s advantage. The Haswell chip launching in this second quarter is a great design for a new class of power-efficient, ultra-sleek, touch-enabled designs for notebooks, convertibles and tablets, but the first two categories are clearly Windows 8 devices and the tablets will likely be split between Windows 8 and Android. Windows 8 has had lackluster adoption so far, but Otellini, who personally upgraded from Windows 7, endorsed Windows 8 and forecasted growth during the peak fourth quarter holiday season.

Until the Bay Trail chip ships in volume late this year, Intel will focus on re-engineering various form factors of very thin, very portable Haswell/Windows 8 devices centered around a $599 MSRP. Late in the year, Haswell and Bay trail Windows 8 designs will dip into the $400 to $300 range, according to Otellini. He even forecasted "non-core" processor-based devices in the $200 range that, given the licensing cost of Windows 8, must run Android or Chrome OS.

The 2013 shipment outlook will be a continuation of the WinTel architecture with innovation emphasizing form factor, long battery life and price. Behind the scenes, with over 1,200 engineers working on Android-related technologies, Intel will focus on design wins for its Bay Trail and later Merrifield tablet and smartphone System-On-Chip processors. Intel’s transition to mobile shipments won’t happen until 2014, when it can ship System-On-Chip technologies that fit the application. Design wins with companies such as Lenovo, Motorola and ZTE will produce material shipment volumes of Android devices in 2014.

Otellini formally retires at the Intel Annual Shareholder Meeting in May, when his successor will be named. It will be interesting to learn if Intel will break with its tradition of promoting CEOs from within and appoint an outsider to return the company to growth. After a short honeymoon, the next CEO will need to explain his or her plan for these initiatives and other new line-of-business initiatives that will bring Intel back to prominence.

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