June 27 (Bloomberg) -- Intel Corp. Chief Executive Officer Paul Otellini is trying to change the rules as he takes on Qualcomm Inc. and Texas Instruments Inc. in handheld devices, betting computing power will help him win over customers.

Intel is shrinking personal-computer chips to give pocket- sized gadgets the power of PCs. A new product is the first step in Otellini's latest attempt to enter a business Intel fled in 2006, when it abandoned plans to make chips for mobile phones after spending six years and an estimated $5 billion.

Otellini says consumers will spend as much as $10 billion by 2011 on handhelds, successors to today's advanced handsets that will operate like mini-computers. Qualcomm and Texas Instruments, already bulking up their phone chips to handle more Web traffic, may prove just as formidable as last time.

``I'm skeptical -- that business is tough,'' said analyst Bill Gorman at Pittsburgh-based PNC Institutional Investments, which owns 10.8 million Intel shares, according to data compiled by Bloomberg. ``There is very difficult entrenched competition. Qualcomm continues to push state of the art; TI is going to remain a major player.''

Intel, the Santa Clara, California-based company whose products are the brains in more than 75 percent of the world's PCs, says only devices with chips based on those complex processors can run the Internet properly because the software at the backbone of the Web was written for computers.

Sales Trail

Otellini predicts PC makers will buy Intel chips for new handheld computers, a market Texas Instruments and Qualcomm say their handset customers are exploring. Once he's won over mini- computer buyers with the new product, called Atom, Otellini plans to court phone makers as Intel creates less power-hungry models.

Targeting handset makers would be a reversal from two years ago, when he sold the unit that made phone chips after failing to win orders from the biggest manufacturers. Instead, the Intel chief focused on extending Intel's lead in PC semiconductors over Advanced Micro Devices Inc.

Still, Intel's sales growth lagged behind other chipmakers' over the past five years, its 7.6 percent average gain falling short of the average 18 percent pace of the companies in the Philadelphia Semiconductor Index.

``In order to grow earnings, markets like cell phones -- or anything that connects to the Internet -- are what Intel has to go after,'' said Pat Becker Jr. of Becker Capital Management in Portland, Oregon, which owns Intel shares and manages $2.4 billion. ``I expect them to get a foothold.''

Intel, down 19 percent this year, fell 10 cents to $21.49 at 4 p.m. New York time on the Nasdaq Stock Market.

Beating IPhone

Will Strauss, an analyst at mobile-phone chip industry monitor Forward Concepts Co. in Tempe, Arizona, estimates Intel spent more than $5 billion on its phone unit before selling it for about a 10th of that in 2006. Intel, which plans to lay out $5.9 billion on research and development this year, hasn't disclosed its budget for the new venture.

The first product for the handheld market will power so- called mobile Internet devices. People in their 20s and younger are likely buyers because they want faster access to pages like Google Inc.'s YouTube video site, according to Intel product manager Pankaj Kedia.

``Today you can only watch and capture video sitting down in front of a PC,'' Kedia said. ``We want to unleash that experience.''

The handheld devices will be powerful enough for users to watch movies and surf the Web faster, surpassing the performance of advanced phones such as Apple Inc.'s iPhone and Research In Motion Ltd.'s BlackBerry, Kedia said.

Power Hungry

Texas Instruments' wireless business chief, Greg Delagi, says performance alone won't win Intel customers. Today's devices eat less power than the Intel handhelds, allowing them to run longer, he says.

The new devices based on Texas Instruments' OMAP processors will draw about a watt of power compared with as much as 5 times as much for an Intel Atom-based product. That's the difference between lasting more than a day on typical battery and not lasting a morning, according to figures from Texas Instruments.

While Kedia says Intel plans to introduce a processor that will use a 10th the energy of its current ones, Delagi said that won't be enough.

``Even if they have another order of magnitude reduction, they're still not in the ballpark of where they need to go,'' he said. ``They can get there in time. But it's going to take a lot of time, a lot of effort.''

Qualcomm Fight

Qualcomm has its own chip aimed at improving the graphics performance of phones, the Snapdragon processor. The chip will help devices display Internet pages and video with higher resolution, said Sanjay Jha, San Diego-based Qualcomm's chief operating officer.

Intel's success in the PC market may hurt as much as it helps. The chipmaker's dominance lets Otellini charge higher prices. That scared off customers last time and may do so again, according to analyst Jim McGregor at research firm In-Stat in Scottsdale, Arizona.

Kedia counters that the success of the new, Intel-created category of mobile Internet devices will attract phone makers looking to expand their product ranges. Meanwhile, Otellini is taking the long view.

``We're not going after the $35 phones that are being sold in Africa, yet,'' he said at an investor conference May 28. ``Ten years from now, we will be.''

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

Last Updated: June 27, 2008 16:07 EDT