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Summary:

Intel this afternoon reported fourth-quarter profits that rocketed past expectations, buoyed by a rebound in the PC market. But unlike the past two decades, the chip maker can’t count on continued growth in PC buying and other familiar benefactors to keep its momentum up.

The tech earnings season kicked off with a bang this afternoon, as Intel reported much higher-than-expected fourth-quarter profits of $2.3 billion vs. just $234 million for the comparable period the year before, and revenue of $10.6 billion, up 29 percent. “Our ability to weather this business cycle demonstrates that microprocessors are indispensable in our modern world,” said President and CEO Paul Otellini. Still, for the decade ahead, Intel can’t count on high PC market growth and other familiar benefactors.

Among notable results for the company’s various divisions, Data Center Group revenue was up 21 percent year-over-year (there have been predictions that better times lie ahead for companies selling high-margin servers and producing chips for them), and average selling price for chips came in higher as well (so the company is selling more than just low-priced Atom chips). Intel does continue to benefit from growth in netbook sales with its Atom chips, and a possible coming wave of upgrades to Windows 7 at businesses could benefit it as well.

Nevertheless, as this decade begins, things are different for Intel compared to the start of the previous two. At the onset of the 90s and the Naughts, dramatic growth potential for PCs made it obvious that Intel’s fortunes would rise significantly with them. Although a solid rebound in the PC market helped it in the fourth quarter (keeping in mind that the fourth quarter of 2008 was abysmal for the PC market), the company no longer has the same long-term, PC-driven wind at its back to look forward to for the next decade — and even Intel’s presence inside Apple systems can’t make up for that problem.

Phones on Fire, PCs — Not So Much

Researchers at Gartner have just predicted that by 2013, mobile phones will handily outpace PCs as the predominant way for people to interact with the web. Gartner foresees the total number of PCs at 1.78 billion in three years, while the number of smartphones and web-ready phones will sit at 1.82 billion units, with rapid  growth ahead for mobile phones. The trend toward mobile usage will change the whole infrastructure of the web, and web design.

Meanwhile, despite good notices for its CES demo of the LG GW990 smartphone running Intel’s new Moorestown chip and the Moblin OS, the fact is that Intel, like Microsoft, just doesn’t have enough equity in the rise of smartphones. As ARM CEO Warren East told Computerworld this week:

“We’ve been saying that the 100 percent share of applications processors in phones that we have can’t continue. We don’t really see Intel making meaningful inroads into it, not for many years, probably never. In order [for device makers] to switch architectures, the Intel product has to be significantly better to outweigh the cost of switching.”

ARM chips are headed beyond mobile phones and will make it into netbooks, smartbooks, and many new kinds of portable devices, where Qualcomm is becoming an increasingly significant player, in addition to its existing presence in mobile phones. Qualcomm is also leaping past Intel’s 32-nanometer manufacturing technology, and will produce 28-nanometer chips. In phones and in many new types of mobile devices, that advantage could help deliver faster chips that cost less than Intel’s. AMD is behind Intel in 32-nanometer chip manufacturing, giving Intel a short-term advantage, but will catch up next year, increasing competition between the companies.

In the Crosshairs

In addition to these issues, Intel is under intense scrutiny for any exclusionary or anti-competitive practices that regulators can dredge up, and is ensconced in a wave of bad PR. Nvidia had to be dancing in the streets as the FTC recently sued Intel, claiming that it abused its market power and cut competitors out of the marketplace. Nvidia wants to make sure vendors can buy and use its Ion processors that accelerate graphics inside netbooks containing Intel’s Atom chips without paying a higher price for the Atom chip.

The FTC’s move follows a huge fine from Europe last year, and Intel also paid out $1.25 billion last year to settle long-standing disputes over business practices with AMD. The company is even drawing criticism for what many people feel are exclusionary practices toward proposed industry wide-standards such as USB 3.0.  The new standard is much faster than USB 2.0, but Intel has guaranteed its slow adoption by pledging not to support it until next year.  Why would it do that? The answer is that it favors its own LightPeak connectivity technology, which has little industry traction.

As long-time Intel CEO Andy Grove used to say when the soaring PC market was guaranteeing Intel quarter after quarter of success, “only the paranoid survive.” With mobile phones reshaping tech usage and the web itself, the PC market growing more slowly now, scrutiny from regulators, and more, Intel’s sterling results from today certainly don’t mean the company shouldn’t be paranoid about tomorrow.

Image courtesy of Intel.

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  1. Yes, mobiles are coming by the billions, but other devices (apart from mobiles and PCs) are also getting increasingly connected. The TV/STB chip market does not throw a clear winner and Intel for sure is not in the race here. Could be something to look at…

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