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Intel Aims Small but Misses the Mark


Intel has been trying for years to gain a foothold in mobile devices, and those efforts are becoming costlier.

Three months ago, Intel (NASDAQ:INTC) CEO Brian Krzanich told a room full of people that his company wants to make everything smart, but the so-called 'Internet of Things' concept got little mention during last week's earnings call. There were bigger fish to fry -- most notably, Intel's smartphone and tablet division, which lost nearly $1 billion in the first quarter.
Intel has been trying for years to gain a foothold in mobile devices, and those efforts are becoming costlier. In a bid to sell 40 million tablets this year, the chipmaker is subsidizing hardware makers that use its processors.

Thus far, the subsidies aren't paying off. Intel shipped only 5 million tablet processors last quarter -- not enough for a 10% market share let alone the 15-20% that CFO Stacy Smith is predicting for full year.
The problem is that while Intel's processors have become competitive in terms of performance and battery life, they're still haunted by a lack of integration when compared to rival products built on ARM Holdings' (NASDAQ:ARMH) technology. This translates into higher material costs as tablet-makers are forced to buy components a la carte. It also means poor compatibility with existing designs, the vast majority of which are ARM-based.
These issues might not be so serious if Microsoft's (NASDAQ:MSFT) Windows 8 were more of a success. By the same token, Windows 8 might be more successful if Intel's silicon were easier to adopt.

As it stands, the two companies have been left banging their heads against a mobile market that neither can quite crack. Intel isn't alone in subsidizing its partners -- Microsoft recently announced that it will give away Windows licenses for free on smaller devices -- but bribes may not be enough.
Windows 9 makes its appearance next year; maybe that will do the trick. And Intel has said that its highly integrated Broxton platform, also due out in 2015, will cut material costs by $20 per unit. That, too, could be a big deal.

On the other hand, Google (NASDAQ:GOOG) has its sights set on the PC industry, and Qualcomm (NASDAQ:QCOM) wants to expand into servers. As they say, hope springs eternal, but displacing incumbents is easier said than done.
The challenges that Intel faces in the tablet industry are worse when it comes smartphones where less space and lower prices make integration an even bigger priority.

At the moment, Qualcomm is the only chipmaker to offer a combined system-on-a-chip and LTE modem. This year, it will be joined by Nvidia (NASDAQ:NVDA), MediaTek (TPE:2454) and others -- but not Intel, which won't have integrated LTE until early next year. By then, the frontier will likely have moved.

Moreover, with both Samsung (OTCMKTS:SSNLF) and Apple (NASDAQ:AAPL) pursuing their own chip designs, it's not clear how much of the smartphone market is actually up for grabs.
Where does this leave Intel's ambitions to power even smaller form factors, like wearable tech and the myriad devices that make up the Internet of Things?

On the bright side, these markets aren't so commoditized as the ones for smartphones and tablets, and versatility may end up being as important as integration.

However, ARM has already knocked Intel's six-month-old Quark processor -- the company's smallest offering -- for running too hot, due to "a relatively low level of integration."

At last count, ARM was running away with the market for embedded computing, and Intel's latest effort -- an SD card-sized computer called Edison -- experienced a setback of sorts last month when it was announced that the initial release would be running Intel's Atom processor rather than the more energy-efficient Quark.
Anything could happen, but so far Intel's best results have come from aiming big.

Gartner estimates that the domestic PC market grew 2% last quarter, due in part to the expiration of Windows XP support but also as a result of Intel's push of Ultrabooks, 2-in-1s, and the niche market of tablet PCs. Apple's 13-inch Macbook Air now enjoys better battery life than the iPad thanks to the improvements Intel made to its Core line of processors. Competitor AMD (NYSE:AMD) has been effectively squeezed out of the server market.

These are real achievements that could pay off handsomely down the road; but don't count on Intel to win the future by playing small ball.

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