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ARM (NASDAQ:ARMH) processors, not Intel’s (NASDAQ:INTC) Atom, will benefit from the current technology-economic cycle.

While Intel’s Atom will hold more than an 80% share of the 21.5-million netbooks sold in 2009, a movement is underway that will enable the ARM processor to gain a 55% market share in 2012.

ARM processors, not Intel’s Atom, will benefit from the current technology-economic cycle. Anyone thinking that ARM will make up only a small percentage of netbooks gong forward is not thinking outside the box.

To begin with, Netbooks were invented as a means for people to connect to the Internet and communicate. It has its foundations in the One Laptop per Child, a program which Nicholas Negroponte launched to create an inexpensive computer for children in developing countries. The hope was that it would have Wi-Fi, a color screen, a full keyboard, and sell for about $100.

Taiwan’s Asustek (OTC:AKCPF), the world’s seventh largest computer manufacturer, took the reins and launched the first commercial netbook in late 2007 and sold 350,000 units in a few months using Intel’s Atom processor. The result was a low-end sub-notebook costing much more than $100 ($300-$400) but selling to middle-class consumers rather than to the poor.

Technology changes are underway to undermine Atom’s grip on the market during a recessionary time when people don’t want, and can’t afford, a second laptop just to carry around. The movement is toward the original intention of a netbook – an inexpensive device for accessing the Internet.

We see two technology factors converging with the poor macroeconomic situation that will create a market for ARM – the release of the Cortex-9 microarchitecture and the emergence of cloud computing.

Mobile internet devices such as smartphones that are based on the ARM11 microarchitecture dominated the market in 2008. A successor to ARM11, the Cortex-A8 and the multicore Cortex-A9, are now entering the netbook market. Multiple cores processors run at a lower speed and process more instructions per watt than single high-speed cores. The A9 offers clock speeds over 1GHz and offers multitasking, one of the current limitations of the ARM11.

ARM runs under the Linux operating system. Linux is free, whereas Microsoft (NASDAQ:MSFT) charges a licensing fee up to $35 on each netbook. To further keep costs down near the intended $100 price point, enter cloud computing.

Cloud computing is a web-based service that resides on the web, and is much cheaper than software packages that are purchased and stored on a netbook’s hard drive or solid state drive. Eliminating a drive will reduce the price of a netbook a further $55.

There is a wide array of open-source software that all Linux distributions share. It is reshaping the software industry by reducing the overall cost structure and represents the future of enterprise software. Some applications require a monthly fee, such as what is available from Software-as-a-Service (SaaS)-leader Salesforce.com (NYSE:CRM), which recently recorded a record financial quarter and its first billion-dollar year. As cloud computing become ubiquitous, competition will drive down monthly SaaS fees.

Along with the growing competition among software service providers, we will see a new infrastructure taking hold, modeled after Hewlett-Packard (NYSE:HPQ) (cheap printer, expensive ink) and the mobile service providers (cheap cellphone, expensive monthly wireless charge). This subsidized bundle model will grow the ARM netbook to greater market shares.

As cloud computing becomes more sophisticated, we will see an Internet Protocol-based convergence of audio, video, productivity applications, and IT data run on ARM-based netbooks.

Stock position: None.

Source: ARM Processors Will Gain 55% of Netbook Market by 2012