How Intel changed its tune on tablets

October 22, 2010: 2:13 PM ET

The chip maker was gung-ho when the market looked small and the iPad was predicted to sell just OK. Now that it's booming, Intel says tablets are important, but not that important yet.

Steve Jobs while introducing the iPad in San F...

Image via Wikipedia

One thing about Intel's strategy when it comes to tablets and its Atom family of mobile processors: it ain't what it used to be.

Even though Intel (INTC) reported strong third quarter results, analysts have speculated the strength of the iPad could affect sales of some PC's—most of which carry Intel chips. Intel CEO Paul Otellini has admitted that's true, but doesn't think that the tablet market will really be big enough to threaten its PC processor sales.

That's a much more tepid stance on tablets than Otellini took just a few months ago. Looking back at Intel's position on tablets after the iPad was released but before it took off, Intel told the press that it would be strong in the tablet market even though it didn't know how big that market would be. The company thought its Atom offerings would be a huge boon—which is how Intel became the market leader for PC chips.

The reality of Apple's incredible iPad sales figures may be why Intel has gone back to pushing PCs over tablets. During investor calls and conferences, Intel executives have reiterated that PCs are a strong market that's still growing. But Intel definitely announced plans to make great-selling tablet processors this summer before the iPad singlehandedly created and cornered the market. "People  [ask] me, 'are you serious in trying to participate in the tablet market?'" Intel Vice President Mooly Eden said during an investor meeting in May.  "The answer is yes."

Eden expanded on that message at the Computex conference in Japan this summer. "We are going to be in the tablet domain," he said, and added that Intel wanted to do that with a chip that had both high processing power and a longer battery life.

The high processing power fits in with Intel's strategy of emphasizing customization to its customers. At Computex, Eden explained how any hardware maker could pick up the chips and put them in all kinds of devices. The message mimics Intel's approach to getting chips into PCs. That is, if you build the best processor, computer makers will come and figure out what to do with it. Eden showed off shelves of Intel-powered tablets at Computex to demonstrate the technology Intel could bring to the tablet space.

The tablet market size guessing game

But the higher-ups at Intel didn't know how big tablets space would be, and they said as much. Referring to the tablet market at Computex, Eden said, "Is it going to be big? Is it going to be small? To tell you the truth, I do not know."

"Who knows what they're going to be?" Otellini said during the May investor meeting. He said that he projected a compound annual growth rate of 73-88% for the tablets and that by 2014, the market would hit 50-60 million units.

It looks like he bet low. The media tablet forecast from research advisory company Gartner is that tablets will reach 54.8 million units by 2011, and mushroom to 208 million units in 2014. What Intel may have missed is how Apple planned to integrate its A4 processor and tablet hardware into one design and manufacturing process. While the PC market has long been a "slap many vendors' components together and make a margin" business, profit margins there have been steadily eroding, making it harder for PC makers to wring out efficiencies to profit on.

Meanwhile, tablets seem to occupy a space in consumers' minds as unified, seamless devices--monoliths of technology. Contrary to Intel's PC success, device makers haven't seemed to work too hard to figure out what to do with Intel's chips. Instead Apple created its own chip for the iPad, keeping the end-to-end development in-house, and shielding itself as much as possible from outside vendors. (Of note, HP's (HPQ) long awaited Slate tablet, powered by the Atom processor, was released today at a price of $800.)

None of this should suggest Intel has turned its back on tablets. Now that the market knows what a tablet is, Intel hopes that tablet makers who use Intel chips like HP will fiercely compete with Apple. "We see it as a market that's beginning to take off," says Intel spokeswoman Suzy Ramirez. "We can thank the iPad for that—for really opening that whole new space."

She insists that Intel is still amped for its tablets. "What Paul was saying at the earnings announcement was a direct commentary on what we're hearing from analysts and some of the media coverage. I think we were just trying to calm some of the chatter around the fact that this was going to indirectly or negatively affect laptop or netbook sales.

From an internal perspective, we continue to be excited about the market. We're definitely a player today and we will be in the future."

Intel will probably come out with great new chips for tablets, but while they're innovating to get something into a device people will buy, consumers are buying iPads. That gives Apple a valuable jump on the market, and it stands to reason that the high-flying Android phone market is also full of consumers who would strongly consider buying an Android tablet as those begin to hit the shelves for this year's holiday shopping season.

Maybe the lesson here is that products that depend on the adoption of open source software can take off once consumers get comfortable with the archetype. The iPhone begat iPads, and Android phones may begat successful Android tablets like the hotly anticipated Samsung Galaxy Tab. Foremost, the tablet market, it seems, needed a poster child to evolve from smartphones and single purpose e-book readers. Now that it has one in the iPad, the question is how much space is left on the poster for anyone else.

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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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