Intel's Coming Battle for Mobile Market Share
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Intel (NASDAQ: INTC) has been known as a semiconductor market leader since the 1980's. It has earned huge profits by dominating the PC chip market, but the increased adoption of smartphones and tablets has raised doubts about the company's ability to remain a top performer.
The next 12 to 18 months will be a critical time for Intel. The company finally seems ready to battle for a place in the growing mobile computing market. If successful, the current pessimism about its future may be changed and the company’s weak stock market valuation might be significantly raised.
Intel's success will be determined by its answer to two essential questions:
1. Can the company design the right product?
Intel has ramped up research and development toward the mobile market and finally seems ready to offer a competitive product. The company made its first mobile-based entry in late 2012 with the Clover Trail Atom. This chip is relatively low performance and low cost and has gained a minimal smartphone foothold with customers like Motorola and Lenovo.
The real test for Intel will be the successful adoption of their next generation mobile offerings. The company is expected to launch its Haswell tablet/hybrid laptop processor in mid 2013. The company’s first major effort in the space, the Haswell is believed to offer greater performance at a significantly lower power cost.
Intel is also expected to introduce the Bay Trail product in late 2013. Bay Trail, an upgrade to Clover Trail, is aimed to offer double the performance of its predecessor.
It is also believed the company will introduce its Broadwell product in 2014. Broadwell, an upgrade of Haswell, is expected to offer even better performance and power management through a smaller form factor.
Intel looks to have a well-developed product roadmap. Given the substantial time and money spent on research and development, there’s a good chance the company will offer products that match or may even surpass the competition.
2. Will the company be willing to price its product correctly?
While having a competitive product is critical to the company's future, placing it at the right price is also mandatory.
Intel faces major competition. Qualcomm (NASDAQ: QCOM) has its Snapdragon product. It’s a market leader with significant smartphone penetration and early tablet adoption with products like the Samsung Galaxy.
NVIDIA (NASDAQ: NVDA) is a fast growing player in the mobile market with the Tegra processor. It’s made a successful introduction into tablets with the Google Nexus, though having less success with smartphones.
Texas Instruments (NASDAQ: TXN) has gained a solid position in the market. Its OMAP chip powers Amazon's Kindle Fire HD tablet and it has wins with many large mobile phone makers. Interestingly, the company announced in 2012 they would wind down OMAP development for smartphones and tablets due to excessive competition.
Intel needs to price aggressively if it wants to break through all the competition. Luckily, the company has a major advantage that can allow it to do so.
Intel has its own chip manufacturing plants. The company has put billions of dollars into manufacturing and these investments have allowed it to achieve great cost savings through economies-of-scale. Intel's competition, for the most part, uses third-party foundry services to produce their chips. Though these foundries can manufacture at the same quality and scale as Intel, the companies that use them do not reap the full benefit of the efficiencies. While the foundries can provide some savings to Intel’s foes, they need to keep most of the financial benefit for themselves.
The pricing advantage Intel may use from producing its own chips is clearly understood by the opposition.
From Qualcomm's 10-K: "Our arrangements with our suppliers may oblige us to incur costs to manufacture and test our products that do not decrease at the same rate as decreases in pricing to our customers. The ability of our suppliers to develop or maintain leading process technologies, including transitions to smaller geometry process technologies, and to effectively compete with the manufacturing performance of our competition, could also impact our ability to meet customer demand, increase our operating expenses and subject us to the risk of excess inventories."
From NVIDIA's 10-K: "... we cannot be certain that our third-party foundries will manufacture our products at prices that are competitive to what our competitors pay. If our third-party foundries do not charge us competitive prices, our operating results and gross margin will be negatively impacted."
Intel looks ready to make its move into the mobile market. The company appears capable of creating the right product that matches or exceeds the competition. But while the company looks like it also has the capability to price product aggressively, whether it has the will to undertake a necessary price war to gain market share against entrenched competition is unclear. Intel has lived on a near monopoly and its outsized margins for a long time. To endure short-term pain for long-term gain is not a concept the company has had to consider before.
But the company faces a critical inflection point, it will soon be decided whether they are a major player in mobile or not. If they execute well on both product and pricing, Intel might be surprisingly dominant in a very short time and the benefit for shareholders could be significant.
grahamsway (Bob Chandler) has a long position in Intel. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!