The Problem With Intel Is Intel... And Microsoft

| About: Intel Corporation (INTC)

I have been one of the primary cheerleaders for Intel (NASDAQ:INTC) on Seeking Alpha for the past two years. The stock price has done precisely nothing for investors during that time.

I am always mesmerized by the technology involved with the design and manufacturing of something as complex as a multi-billion transistor integrated circuit, but I'm going to set that aside for a moment.

Osborne Effect

"The Osborne effect is a term referring to the unintended consequences of a company pre-announcement made either unaware of the risks involved or when the timing is misjudged, which ends up having a negative impact on the sales of the current product. This is often the case when a product is announced too long before its actual availability. This has the immediate effect of customers canceling or deferring orders for the current product, knowing that it will soon be obsolete, and any unexpected delays often mean the new product comes to be perceived as vaporware, damaging the company's credibility and profitability."

In August of 2010 Intel bought McAfee for $7.68 billion. An acquisition of that size requires a detailed explanation to shareholders. The explanation to Intel shareholders was that McAfee would give Intel the ability to combine the security software capabilities of McAfee with the ability of Intel to design hardware "hooks" into the processor chip itself in order to finally, and for all time, defeat the hackers and malware sickos.

Looking back to August of 2010, Intel was just recovering from a chipset SNAFU on the new Sandy Bridge processor. Those in the know realized that the Sandy Bridge was a new architecture, or "Tock" in the Intel Tick-Tock schedule, and that the earliest that Intel could design the required hooks into the processor chip for the promise of malware and virus free computing would be the next Tock, which would be about three years away.

Given that bit of information, IT managers in the corporate world would be insane to schedule any large scale upgrade of hardware knowing that much better computer security was just around the corner…well maybe just around TWO corners. I suspect that informed individuals knew the same thing and postponed hardware upgrades. Thus, something of a partial Osborne Effect settled over Intel's CPU business.

Intel has now "Ticked" through Ivy Bridge and "Tocked" right into Haswell, which has some of the security enhancing features that will make sense of the McAfee purchase. McAfee announced "LiveSafe" on July 23rd to dovetail with the wider availability of Haswell in client PCs. McAfee is now being shipped installed on new PCs as a thirty day trial and then an $80 per year subscription for comprehensive security protection for your PC and other Internet connected devices. I know; it's on my new computer.

Some anecdotal comments on the availability of low power Haswells:

As anyone who reads my articles knows, I have been whining about the apparent non-availability of Haswell based clamshell notebooks for a few months. Well, my boat anchor finally died, so the urgency to find a Haswell Ultrabook was dialed up. Virtually every Ultrabook that I looked at used the third generation Ivy Bridge processor. I was basically looking for a WinTel version of the Macbook Air. I finally found a Lenovo U430 Touch that meets most of what I was looking for. I had to take a Mickey Mouse hybrid drive with a 16Gb SSD embedded in a 500GB HD, but still have 10 hour battery life. The conclusion that I came to about all this was that low-voltage Haswell was having birthing problems. Apparently Apple got all they needed and some of the "convertibles" got what they needed. The general clamshell notebook products were left with Ivy Bridges.

I believe this LV Haswell logjam is breaking up as I type this.

The combination of McAfee and Haswell and future processors are so important to Intel that they had no choice but to risk a partial Osborne Effect for the past three years as a "Valley of Death" that needed to be crossed. Imagine what an $80/per year anti-virus+ subscription on even half of the PCs in the world means to Intel. That amounts to $120 billion per year of ongoing, proprietary, high margin revenue to Intel, well over 2X the company's total current revenue.

Over these three years, there has been about a 20% decrease in the ship rate of client PCs. The volume of PCs has dropped from about 360 million to about 300 million. During this time the pundits have had fun jumping on the Steve Jobs bandwagon discussing the Death of the PC.

I sincerely believe that the decline in sales has been primarily a function of delayed buying while waiting for the "Malware Killer, Haswell". If this is true, there is a great deal of pent-up demand for Haswell consumer PCs with a concurrent re-fresh in the corporate world. If we see an increase in year over year PC shipment over the next two quarters, the Osborne Effect will be confirmed.

The next speed bump for Intel will be negotiating the Windows 8 debacle. I gave up and am having Win8 ripped out and Win7 installed in my new computer. I am so frustrated by Win8 that the very sight of the "Metro" screen elicits a feeling of outrage that I have never felt before. Some smart and tech savvy friends have made comments such as, "Windows 8 almost brought me to my knees", "When I tried Windows 8 I thought I had a stroke, because I couldn't do anything", "It was like tipping over a mechanics tool box on a freeway, you have to dash out and pick up a tool in full traffic".

What was Microsoft (NASDAQ:MSFT) thinking? Paul Ottelini was right when he said that Windows 8 was "not ready". I think it is an unmitigated disaster. It couldn't be worse if Microsoft had contracted Apple to write Win8 for them! I have to work up the courage to try Apple's (NASDAQ:AAPL) MacBook again, then I can give my Windows machine to someone who I don't like very much.

If the PC dies, the murderer will be Microsoft.

I think Intel survives all of this, I think the malware free PC business will recover to previous levels (I wouldn't expect big growth, it is a mature business, after all), I expect that the McAfee purchase will turn out to be the smartest thing done by Intel in their history.

I have been wrong on my expectations for Intel for the past two years, but I think it is a 2014-15 story for reasons (McAfee, etc.) that are not well understood at this time.

Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.