Just before the battle of the tablets begins in earnest, as about 30 companies get ready to launch devices which will go head to head with Apple’s iPad in late 2010 early 2011, Intel says its will deliver a set of 3rd quarter figures which may suggest consumer Netbook and PC sales have stalled. Intel is only saying it will have revenues of around $11 billion plus or minus $200 million, whereas before its high end estimate was up at $12 billion.
Intel was full of confidence when it announced its last set of figures, beating all records and getting back to extremely profitable ways, but now says it is being affected by weaker than expected demand for consumer PCs in mature markets. A drop of that kind of figure, around $800 million represents at around $150 worth of Intel chips per PC, a fall of around 5.3 million devices, and by mature markets read the US and Europe.
Coincidentally that’s pretty close to the number of iPads that will probably have shipped by the end of the third quarter, and those will have shipped in the US and Europe. However these situations may well be linked and people who buy an iPad may well have put off PC upgrades or notebook purchases, while those who haven’t made their mind up yet could potentially hold off on buying anything. This kind of sales freeze often happens when a new (credible) form factor enters any market.
But this is potentially a long term disaster for Intel as tables rise in popularity. In two years time Apple is expected to sell more like 50 million iPads. Faultline is concerned that Apple will shortly have about 30 rival devices on the market as competitors get into going head to head with Apple on the tablet far more quickly than they managed with the iPhone (that’s because it’s not using very much different from the iPhone in the way of technology). These 30 rivals may well take market share away from Apple in tablets. But they will also have the effect of legitimizing the tablet market, making it okay to buy one instead of either a notebook or netbook, but also in some cases, especially in the consumer market, instead of a new desktop.
It’s not that desktops will go away, not at first anyway, it’s just that the home PCs will get replaced in a far slower cycle. The next step is for enterprises to begin doing the same thing, and for that to happen there needs to be all sorts of new pieces of software which allow the iPad and its rivals to take a peek at enterprise applications, and to carry Windows emulators or go to my PC style Apps, where the iPad can look at an enterprise desktop which is remote.
This week one Californian company called DeviceVM, came out with an iPad piece of software which opens a remote desktop PC, so that users can manipulate their desktop software from their iPad. It’s a neat way of effectively putting Windows and all those corporate Apps on your iPad. It’s a $20 app and we can imagine lots of people deciding to pass on a notebook and use an iPad to talk to their existing desktop. The need for upgrading the Desktop then goes away for quite some time, as the IT department begins to buy into Apple’s vision instead of Microsoft’s.
Right now the top end 3G iPad costs $800, but who needs 3G when the corporate world has WiFi throughout, and people at homes and in hotels also have WiFi. Your average road warrior (mobile workforce) is mostly within range of WiFi. So that’s $500 for a WiFi iPad.
But that’s now. We would anticipate that improved manufacturing capability of all of the iPad components, including the Apple designed and Samsung built A4 chip, would drive down manufacturing costs for Apple. And competitive pressure and design improvements will lead to more models coming out of Apple and others, all at lower prices. So if we anticipated a 33% drop in tablet pricing over the next year, we might soon be in a situation where the average WiFi tablet costs just $350 and a year later, more like $250.
If that pricing materializes then Intel is looking at more quarters like this one, as the high volume markets for PCs take a pounding, as people slowly work this out, and as an eco-system for tablets develops, and perhaps PC sales never quite recover. We accept that the applications base for Wintel based devices (Window on Intel) is not going to erode to zero in a hurry, but it will erode fast enough to take the shine off Intel’s figures.
You may choose, as we do, to interpret Intel’s acquisition of both MacAfee and of Infineon this week as a direct result of this situation.
Our initial assessment of the iPad was that it might take 10% of 5 separate markets ‘ sub-categories like smart phones, netbooks, notebooks, ebook readers and portable DVD players. But what if the iPad and its rivals eat 20% of all those markets within 12 to 18 months? Sure it changes our digital media industry and opens many opportunities for video on such devices and that, in itself, impinges on the TV market, for instance the Apple TV, Amazon and Google TV service announcements which happened this week.
But for the companies that currently occupy those spaces it could wreak havoc, and the bottom line is that of the majors, Intel is the biggest company in the firing line, given that ARM chip designs form the basis of all these new efforts currently. The other worry for Intel is that Apple made the move on it core Mac processors from IBM power PC chips to Intel, purely because Intel promised to focus on Watts per MIP ‘ a measure of how much processing power you get for the battery power you use up. Intel remains significantly behind on this measure and until it catches up, and it may never quite catch up, there will remain possibilities that even the MAC architecture could one day desert the Intel camp and head for some souped up ARM multiprocessor core beast.
So how do you respond if you are Intel? You try to eliminate any advantage that ARM has, both in power consumption, but also in security issues ‘ both Spam and Virus controls, and that might lead you to buy one of the leading virus specialists. Future Intel chips with some security element embedded may well be able to cut deeply into the weaknesses of the PC architecture compared to ARM.
You might also buy another of Apple’s suppliers, to cement relations there, and Infineon currently supplies the iPhone and iPad with their 3G chips. But these are of course ARM chips and that means that once again Intel will have a license to the ARM architecture, like in the bad old days when it had its Xscale phone architecture, before it sold it to Marvell.
From there it might use that expertise to develop ARM processing power, at the same time as it continues to chase the ARM power curve with its own Atom applications processor elements. Soon it will have an entire phone SoC business, which could support either an all ARM architecture, as well as one which supports the Intel instruction set for applications. And this would be as much for producing tablets of every flavor, as developing phones. But we’re not sure how Intel goes from there to dominance in tablets, and it’s hard to see that it ever can. Perhaps another campaign such as Intel Inside and Centrino might make headway, but it will never have the dominance that it had in PC chips and motherboards.
Intel would rapidly be able to support Android on a tablet or a phone as well as its own Meego OS on both tablets and phones and of course Windows on both. It might also slowly play catch up in power consumption with a ARM license, the architecture which currently leads in that department.
What the iPad is showing us is that we are actually moving to a world where all PC style devices have the potential to be exploded. That is, broken down into their key components, such as those which give us a complete portable device, and others such as keyboards, storage back up, printers and WiFi routers, which may stay in larger, cheaper stations at work and at home.
The device becomes a large Russian doll at work, where you can type at full speed, and get the benefit in an enterprise situation of modern IT support and specially written, shared applications. You might then be able to take out a portable tablet style device and take it home with you, and out of that you may be able to pull out a simple phone and identity device which you can make phone calls on and use as an electronic wallet.
In such a paradigm shift in device layering, it is hardly surprising that the major component supplier to the older style Windows PC, will be disadvantaged and will have to take radical steps to create new revenue streams from the new form factors.
The old Intel edict, coined in its founder’s autobiography, ‘Only the paranoid survive,’ will now apply more to Intel than at any other time in its past. It needs a semi-dominant grip on ARM innovation, and it needs to support Android and Chrome, potentially the future dominant operating systems for mid-range devices, just as fervently as it supports Meego, its joint venture Linux with Nokia, and Windows, the OS that gave it its supremacy.
Intel said that it would update fourth-quarter and full-year expectations with its third-quarter earnings report on October 12. Expect at that time a certain amount of spin as Intel tries to show that these two acquisitions that it has announced, and any more that it may announce subsequently, are factored into its future roadmap, to remove the considerable uncertainties that the tablet market has brought to Intel’s future. But that will just be spin.