Will Intel Finally Crack Smartphones?

Walk into any electronics store around the world and ask for the smartphone or tablet with Intel (INTC) inside, and you'll get a blank look. After more than 10 years and billions of dollars spent developing mobile processors, Intel-powered products are as difficult to find in mobile devices as they are hard to avoid in personal computers—there isn't a single phone on sale that's based on the company's processors.

So when Intel Chief Executive Paul S. Otellini recently asked a roomful of analysts and investors which chip company is raking in the most from the mobile explosion, the room filled with nervous laughter. Qualcomm (QCOM)? Texas Instruments (TXN)? Samsung? Those are the dominant chipmakers for mobile devices—and they all license technology from ARM Holdings (ARMH). It's none of the above, Otellini declared after the tittering died down. The answer? Intel.

His confidence is based on the calculation that for every 600 smartphones or 122 tablets running Netflix (NFLX) videos or Facebook updates, there's an Intel-powered server in a back office somewhere churning out data. Otellini predicts that the thirst for mobile video, audio, and other content will help push Intel's data-center chip sales to $10 billion this year—about a fifth of projected revenue—and to $20 billion within the next five. Its top-of-the-line Xeon server processors cost as much as $4,616 each, compared with around $15 each for smartphone chips. (Processors for PCs go for $90 on average.)

Impressive as those numbers are, Intel is still missing out on the fastest growing area of computing. In the first quarter of this year, smartphone shipments grew 80 percent to 100 million, according to market researcher IDC. The PC market declined 3.2 percent to 81 million. Intel's problem is that it's still building muscle cars in a world where consumers are buying hybrids. The company has been slow to create a processor cheap and energy-efficient enough to suit mobile devices, which run all day on battery power.

That doesn't mean Intel has given up on mobile chips. It can't. All those smartphones and tablets with ARM-licensed chips are beginning to eat into sales of Intel's largest market, PCs. "If you look three years out, the lines between a smartphone, a tablet, and a notebook PC will become fairly blurry," says Chris Caso, an analyst at Susquehanna International. "The fear is that some of those ARM-based products are going to encroach on the main product line."

After years of delays, the first phones based on Atom chips—Intel's low-power entrant—will start to appear next year, Otellini recently promised. The company won't say who will be manufacturing the handsets. Nomura Securities analyst Romit Shah says he doesn't expect Intel to grab much share before 2013, when its next generation of mobile chips should hit the market.

These phone chips of tomorrow will use a technology Intel has been working on for a decade called "3-D tri-gate transistors." According to the company, this approach will allow chips to work a third faster while using less power. "The road map for tri-gates is a possible game changer," says Patrick E. Becker Jr., principal of Portland (Ore.)-based Becker Capital Management, which owns Intel stock. "They will have up to a three-year lead, and it will enable them to reenter the mobile market."

Of course, by the time Intel's next-generation mobile processors make their debut, Qualcomm, TI, Samsung, and all the companies that already make phone and tablet processors will have advanced designs of their own. "While it is good to see Paul Otellini's continued commitment to Intel's success in handsets, there is no guarantee that Intel's products will be competitive in 2014 or even align with the market direction," says Jim McGregor, chief technology strategist for market researcher In-Stat. And while Intel's trying to crack the low end of the market, the ARM camp is taking its first steps in designing chips to compete with Intel on its home turf—PCs and, eventually, servers.

The bottom line: The mobile boom is powering Intel's server chip business. With PC sales dropping, it needs to enter the smartphone and tablet market.

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