The 2007 launch of the Apple (AAPL) iPhone ushered in a new era. The iPhone revolution effectively swung the technology market balance of power away from the staid confines of IT department heads, political bureaucrats, and corporate executives, and towards the dive bars of hipsters, club girls, and musicians. The late Steve Jobs' Apple sparked the drive towards fusing minimalist art alongside functional engineering. As such, the smartphone was to ultimately emerge as the chic gateway into a mobile networking ecosystem that integrated office work, entertainment, and instant communication together. For its latest 2012 fiscal year ended September 29, 2012, Apple reported that its iPhone and iPad platforms combined to account for $112.9 billion out of the company's $156.5 billion in annual revenue.
Success at Cupertino served as the literal proving ground for warring factions Microsoft (MSFT), Nokia (NOK), Google (GOOG), Samsung (GM:SSNLF), and BlackBerry (BBRY), who also hope to leverage mobile resources for turning profits. While Main Street remained very well familiar with the headline hardware names, Wall Street traders have busied themselves analyzing the emergence of the Qualcomm (QCOM) Snapdragon line of processors as a key driver of the smartphone market. Behind the scenes, the Qualcomm versus Intel (INTC) meme has remained one of the more intriguing debates through all of Silicon Valley. For once, however, Intel will find itself unable to bully its way into a lucrative space. Intel is dead money.
Qualcomm - ARM Alliance
Intel is now faced with the challenge of deconstructing the twin engine Qualcomm - ARM (ARMH) machine driving the smartphone market. Simon Segars, ARM CEO, described his angle of the competition during his May 14, 2013 interview with Fortune Magazine. Segars then classified Intel, Qualcomm, Samsung, Nvidia (NVDA), and Marvell (MRVL) as semiconductor companies. As such, the semiconductor companies were in direct competition with each other, while ARM collects royalties off architecture licenses to all of the major players, except Intel. Even Apple A-Series chips have been engineered around the framework of ARM architecture. According to its Company Overview, ARM chip designs have been installed within more than 95% of global mobile phones. ARM designs are notable for their low costs and battery efficiency.
Enter the Qualcomm Snapdragon. The Qualcomm business model also effectively called for its engineers to design semiconductors around ARM architecture, before subcontracting out the manufacturing of product to rival firms. The Snapdragon systems-on-a-chip (SoC) line has been hailed as the ideal combination of processing speed, battery conservation, and costs. The premium Snapdragon 800 is packaged with a 2.3 GHz Quad Krait 400 CPU capable of featuring 4k x 2k ultra high-definition video through 4G networks. The Snapdragon is manufactured through 28nm process technology. Qualcomm has emerged as the go-to supplier for BlackBerry, Nokia, and Samsung handsets. Most importantly, the Snapdragon is the favored engine of the popular open-source Android program network.
Within his latest 2012 annual letter to Intel shareholders, an optimistic Paul S. Otellini, CEO, described the "mobile edge" of the company's Atom processors. At the time, this Intel mobile edge powered only six different smart phones, which then included the bargain bin Motorola RAZR I and Safaricom Yolo. Otellini also boasted of Intel's manufacturing prowess, as he speculated that the company would be employing 14nm process technologies into 2014. On October 2, 2013, however, Lenovo abandoned the Intel Atom chip, in favor of Qualcomm technology, for its K-Series handsets. Prior to this announcement, an August 29, 2013 Virtual Metrix experiment showcased a Google Nexus 4 and its Snapdragon chip that significantly outperformed the Lenovo K900 powered by the Intel Atom, in terms of battery life.
Intel Bay Trail
On September 11, 2013, Intel brought the Bay Trail systems-on-a-chip to market at its developer forum in San Francisco. Be advised that the term "Bay Trail" was actually jargon for a particular wing of Intel chips, which were technically referred to as the Atom Z3000 series. Intel aggressively marketed its Bay Trail chips as the ideal engine for what the company described as "2 in 1s." A 2 in 1 machine, such as the Microsoft Surface, has been defined as a fusion between traditional tablet and laptop capabilities and interfaces. According to Agam Shah and PC World, 10 Bay Trail tablets and hybrids will hit shelves prior to the 2013 Holiday Season. Bay Trail Android and Windows 8.1 tablets will begin at $150 and $299, respectively. At these levels, Intel is competing upon price, rather than raw processing power.
Intel bulls, of course, must be willing to debate the state of the mobile market, at-large. The emergence of the Bay Trail chip may signal an ongoing shift out of growth and into product maturity within the smartphone and tablet business cycle. As such, the Intel business plan reads as a Catch-22, where success means that the company was willing to accept weak mobile chip profit margins, in exchange for mass volume. On August 5, 2013, a report out of research firm IDC did indicate that tablet shipments had slowed sequentially between the first and second calendar quarters of the year. In all, Samsung and Apple slogged through a calendar Q2 2103 decline of 5.4 million tablet shipments, in comparison to the prior quarter. IDC did follow up this report with a September 11, 2013 forecast that projected 78.9% 2013-2017 tablet market growth, in terms of unit shipments. IDC, however, also intimated then that smartphone and tablet markets have already shown "early signs of saturation and cannibalization."
Prospects within the smartphone market have appeared even bleaker for Intel, in regards to upstaging the market leading Qualcomm Snapdragon. On October 4, 2013, research firm comScore released its report for August 2013 market share. This comScore report actually presented averages of data taken for the quarterly period that spanned between June 2013 and August 2013. Google Android and Apple iOS then operated respective 51.6% and 40.7% shares, upon release of this latest report. At the bottom of the heap, BlackBerry and Microsoft have been left to fight over a shrinking 7.2% share of the market. Taken further, the comScore data confirmed that Intel chips are all but irrelevant within the smartphone space. Again, Apple designs its own A Series chips, based upon ARM architecture. Beyond Apple, Snapdragon has remained the go-to name to power popular Samsung Galaxy and upstart Nokia Lumia Windows phones, alike. Ironically, Intel has failed to capitalize upon its own Moore's Law.
The Bottom Line
Intel has typically classified its businesses according to PC Client, Data Center, Software and Services, and Other Intel Architecture operating segments. Other Intel Architecture was defined as an umbrella category covering netbook, tablet, and smartphone mobile chip sales. Between 2010 and 2012, The PC Client Group generated 66.3% of average annual revenue at Intel. Taken further, top-three Intel customers Hewlett-Packard (HPQ), Lenovo, and Dell (DELL) accounted for more than 40% of total 2012 net sales at the company. In contrast, Other Intel Architecture generated a mere 8% of corporate 2012 revenue, altogether. On October 9, 2013, research firm Gartner estimated that the global PC market declined by 8.6%, in terms of shipments, between calendar Q3 2012 and Q3 2013. Be advised that Intel fiscal years have largely coincided with calendar years.
On October 16, 2013, Intel stock closed out the trading session at $23.70 per share. Wall Street then applied a $118 billion price tag to Intel, in terms of market capitalization. Intel may finish up this 2013 fiscal year with $8 billion in profits. At this rate of performance, Intel now trades for 15 times current earnings. A price-to-earnings ratio of 15 is wildly expensive for a business in decline. Intel has no answer for the Qualcomm Snapdragon. Intel therefore has no real answer for ongoing PC market contraction. Intel is a strong sell.