The Great Intel Spin-Cycle

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If you like millions opened the Wall Street Journal this morning, you would have seen this headline screaming at you: Big Bet Behind Intel Comeback: In Chips, Speed Isn’t Everything.

The story waxes eloquent about how chipzilla survived the downturn and is making a comeback, thanks to its well-timed moves into wireless and mobile computing. It has some interesting points but being a naysayer, I thought would be prudent to point out.

bq. One sign of the new approach: Intel this year boosted the speed of its desktop microprocessors just once, compared with six times last year. Yet Intel has gained market share against chief rival Advanced Micro Devices Inc. More Centrino-style product bundles are on the way, which Intel hopes will make it even harder for rivals to keep pace.

Anyway I shall overlook the gains made by PowerPC G5 and AMD. Or that Intel got kicked out of the X-Box. It is a sign that maybe Intel cannot produce leading edge processors. But still, it is brilliant spin on IntelÌs shortcomings.

I have never had doubts about the media management abilities of Intel. Much like the Intel Centrino ad where a man is logging on to the Internet while a snowstorm rages around him at the base camp of maybe Mount Everest. (Intel cleverly forgets to mention that there are no Wi-Fi connections at base camp of pretty much most mountains but never mind, why nit-pick÷.)

But there were many things, which cannot be overlooked. For instance that the average selling price of an Intel chip is off by almost a $100 to $150 since the heydays of PC back in 1996. And falling.

In case you missed Dell third quarter conference call, the company pretty much said that most of the growth is coming from the low-end of the PC market, which is very price sensitive. These $600 dollar machines cannot afford a $150 dollar processor. It needs something cheaper, like around $60. As a result Dell has been focusing on higher margin products such as servers and storage. This is not a good sign for IntelÌs future because Dell is fiercely loyal Intel customer.

Intel by its own admission has been touting supreme growth in India and China, two very price sensitive markets, and the performance of AMD in those markets bears that out. However, Intel will have a bigger headache next year when Advanced Micro Devices (AMD) transitions its 64-bit processor manufacturing process to 9 nanometers and become cost competitive with almost everything Intel has to offer. This will take away much of the pricing power Intel has in the high end of the market where it sells super expensive Xeons and Itaniums (does anyone really buy this crap?) Despite what the numbers say, remember this little piece of advice: Next year PC industry might grow by 10 percent but the average selling prices of computers are going to fall by 10 percent. It is clear that PC is a zero sum game right now.

Here is another recent article, this one by Steven Levy of Newsweek which points out the obvious:

bq. Trouble in PC-land. While consumers have found some reasons to buy new PCs, the corporate world has less incentive. ÏThereÌs never been such a gap between the IT world and the consumer,Ó says Ray Ozzie, CEO of Groove Networks. ÏIn the corporate world, the bosses want to lock down the desktop so you canÌt install or change anything. But at home the same users can hook up cameras and music devices, and find new uses for their PCs.Ó Meanwhile, PC makers are increasingly hedging their bets by selling more profitable electronics devices like TVs, cameras and digital jukeboxes.

With that as a backdrop, you perhaps have a fair idea that the PC desktop market is pretty much in the crapper. Now lets get to the mobile strategy. Indians and Chinese are buying desktops and not notebooks, so that takes two growth markets out of the equation. In addition the big demand for notebooks in the US and Europe is coming from consumers, not corporations, which means the price points are going to fall below $1000, predicts Ashok Kumar, an analyst with Piper Jaffrey. I tend to believe him for he has been pretty accurate on predicting these things.

And as far as Centrino strategy is concerned, I have just one thing to say: Does Intel manufacture its own Wi-Fi Chips? What up with 802.11G, Gee!

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