Intel on the outside

October 19, 2010: 2:59 PM ET

The company missed the iPad revolution but says it's not worried. Should it be?

Apple watchers all figured the iPad would do well, but even they were astonished when the company sold 2 million iPads in less than one full month after its release. And that rate will probably only grow: Analyst Maynard Um with UBS estimated that Apple (AAPL) would sell at least 28 million iPads in 2010, according to AppleInsider.

One might think the rising iPad tide would lift all of Apple's vendors with it, but one thing iPads don't have inside is Intel -- Apple decided to go with its own ARM-based chip, the A4. One of the reasons for that was that Intel didn't have a chip in its arsenal that Apple considered tablet-worthy. While Intel certainly hoped to get Apple to look at its mobile-chip lineup, Atom, to fit the bill, ultimately Apple decided to stick with the architecture of the little-brother iPhone's operating system to create the iPad, rather than figure out how to cram Intel-based OS X onto the tablet.

That leaves the plan for Intel (INTC), when it comes to tablets and its core business, a little shaky, something CEO Paul Otellini as much as acknowledged in his earnings call, even while assuring analysts that the company was already making up for lost time. Though Intel has had versions of Atom going back to 2008, it's hard for the company to avoid looking as if it somehow missed the boat, which raises questions about how fast it can catch up.

Tablets rising

Tablets of course aren't Apple's invention. Bill Gates predicted that they would become the future of computing during the release of Microsoft's Tablet PC in 2001. Other products surfaced since then, but nothing struck a chord with consumers until the iPad. Even when the iPad was first announced, analysts were skeptical, for an Apple product anyway, predicting the company would only sell 382,000 iPads per month.

The problem for Intel is that iPads start at $500, making them competitive with both cheap notebooks and high-end netbooks, both of which are likely to be powered with an Intel chip. According to a report by technology research company Gartner, PC sales overall are up by 20.7% compared with the second quarter of last year, but there's evidence that consumers are already choosing iPads over PCs, or at least delaying their PC upgrades in favor of buying the Apple tablet.

So what?

"To be fair, the netbook market has not been a big percentage of Intel's revenue," says Tristan Gerra, a senior research analyst at private equity firm Robert W. Baird & Co.  Intel is easily the leading chipmaker for corporate computers, and is releasing a new processor for high-performance products in the first quarter of 2011, code-named "Sandy Bridge." Analysts predict it will be a big launch, with attendant big sales.

But the company will need to prove that it can make the best chips for something other than PCs, says Patrick Wang, an analyst with investment firm Wedbush Securities. "When you look at the PC proper market, you're starting to see it mature over time; you're not seeing significant unit growth."

Intel CEO Paul Otellini has said that Intel thinks growth in tablet sales will go hand in hand with growth in PC sales, meaning the iPad will have little impact on the company. The iPad would effect PC sales at the margin, he said during Intel's third-quarter earnings call. "We focus on our core business and our core-based products," says Intel spokeswoman Suzy Ramirez. "That's a huge part of our business, and we really don't see that going anywhere."

Ramirez is probably right about the tablet's weak affect on PC sales, something analyst Gerra also believes in the short term. But what Intel needs from tablets isn't necessarily revenue -- it needs to show chip buyers that it's not missing the boat on the next wave of consumer interest, mobile and tablet devices, which, thanks to iOS and Android, are dominated by ARM-based chips made by companies including Texas Instruments (TXN), Qualcomm (QCOM), and yes, Apple.

Finding a mate

Intel is already looking at a number of partners in the tablet fight, Ramirez says, including Microsoft Windows, Google Chrome, and the open source Meego. But Chrome is being positioned by Google as a netbook OS, with tablets probably more commonly using Android.

"Google is basically the main alternative to Apple," Gerra says; they'll be launching tablet models like crazy. "Google is most likely going to use an ARM-based architecture."

Intel's strategy so far has not been to push a chip targeted for tablets, but to push its line of Atom microprocessors anywhere it can. "We see it playing everywhere," Ramirez says.

Intel says it will introduce a significantly new version of Atom, code-named "Oak Trail," toward the end of the first quarter of 2011. Despite Intel's claim to not be fazed by tablets, the chip is being positioned as Intel's answer for tablet and mobile-device makers, since it will include a 3G or 4G wireless radio right on the chip.

"I don't expect it to be wildly successful," Wang says of Oak Trail. "I think their second- and third-generation chips are going to be a lot more interesting." Besides, Intel will need to do more than just make great chips, Wang says. It's going to have to get them into products that sell.

"Say Intel executes their roadmap beautifully -- I have no doubt that they can -- it comes down to the HPs and the Dells and the Nokias. They are the ones that have to design a very interesting product," says Wang.

Financially, Intel is solid. But long term, "the question is whether they can remain a growth company, or are they going to spend a lot of R&D into diversification materials that don't materialize," Gerra says.

Just like the companies it will need to partner with to succeed, Intel is playing mobile and tablet catch-up, for now. Apple surprised the market by creating a huge demand for low-energy processors for the iPad, though its 2008 purchase of PA Semiconductor should've been a clear warning shot that the company was dissatisfied with the chips and road maps Intel, AMD, and other manufacturers had on offer. Now Intel is hoping Oak Trail can make it relevant to mobile and tablet device makers, and maybe even Apple. But Intel operates like all semiconductor companies -- at the mercy of third-party device makers who choose to use their technology. That means, barring some complete change in corporate direction, Intel's future popularity in the tablet space, as a viable competitor to ARM and therefore Apple, is not entirely in its own hands.

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About This Author
Shelley DuBois
Shelley DuBois
Writer - Reporter, Fortune

Shelley DuBois writes on management issues for Fortune.com. Before joining Fortune, she was a producer for National Public Radio's Science Friday and worked for Wired. Shelley has a graduate degree in science, health and environmental reporting from New York University. She lives in Brooklyn.

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