In early 2013 Intel (NASDAQ:INTC) unveiled a daring plan to develop and sell a new consumer device it aptly named Intel TV. The company was going to create a new living-room based entertainment service that would be "far superior" to existing cable and satellite packages. It would be a new direction for the company which up until then was focused on manufacturing behind the scenes electronic components like semiconductors and processors. Going forward, Intel would have the goal of becoming the main "entertainment hub in living rooms around the world." This prominent new consumer electronics device and service would be marketed directly at end users and compete directly with products offered by Intel's closest OEM clients.
Although the plan was ambitious and greeted with a fair bit of skepticism from the investing community, management, led by CEO Paul Otellini, was convinced that this idea would rejuvenate growth for the company and invigorate the company's share price which had flat-lined for the last decade. Intel rented space in New York, Los Angeles and Chicago in preparation for the huge launch. Investors waited anxiously for all the juicy details.
And then - Nothing happened! The set-top boxes never materialized. The revolutionary streaming television service never launched. The details never emerged. Once Brian Krzanich took over the CEO position at Intel, the decision was made to abandon the whole plan. Sources reveal that Krzanich stated "the company could not afford the distraction and expense." Intel now plans to sell off the TV technology division, named OnCue, with Verizon looking like the likely buyer. The retail locations which were supposed to showcase the new television devices and service will instead be used to display Intel-powered laptops and new tablets devices from a variety of vendors.
Great News for Investors
Superficially, it might seem like Intel's short lived experiment could be deemed an undeniable failure. But this is absolutely not the case. Shareholders should be congratulating the company and investors should be perking their ears to understand exactly what this means for the company going forward. I have written before about Intel's problem of perception, but finally, with the company's new found focus on targeted growth, I firmly believe growth and the company's share price will accelerate upwards.
In CEO Brian Krzanich's first annual investor day last Thursday, he outlined a path for Intel's future. The basic premise was that his plan for Intel was not to rejuvenate the brand and kick start the company by adding new business lines and moving into the consumer electronics market with flashy new products. Rather, he would focus Intel's competencies; expanding the company's core business lines and using Intel's huge size to forge manufacturing agreements with other OEM manufacturers.
Krzanich is regarded as a manufacturing expert and he sees Intel's future as a manufacturer of high quality electronic components. In his first six months as CEO he focused his attention on the two main threats impacting the company's core business - the declining PC industry and a lack of progress in smartphones and tablets.
Investors should be overjoyed that Intel has finally found a CEO who understands the true competencies of the company. Krzanich had the courage to pull the plug on a media expansion that would have been both costly and distracting. He has the foresight to understand that the company must aggressively focus on the smartphone and tablet market in order to regain growth and investors trust. And he has the competence to ensure the company can grow its position as the largest semiconductor and processor manufacturer in the world.
I am sure that given Intel's massive R&D budget, coupled with its world leading engineering talent, the OnCue device and television service would have been a quality product. Erik Huggers, a former executive with the British Broadcasting Corporation led the 300 employee strong team which developed the device and then negotiated terms of the media distribution agreement with major networks. By most accounts, the team did excellent work. The device prototype was tested by Intel employees and considered to be far superior to other products on the market offered by cable and satellite companies. Although the full rollout and launch of the product would have been expensive, it stood a good chance of being successful.
Many people who saw a prototype of the device, a nondescript black box, and toyed with the all-important graphical interface software, described OnCue as far superior to what is generally offered by cable and satellite TV companies. - Reuters
But investors should nonetheless be happy that the company decided not to launch the product. Just because the device was not released does not mean that the project was a failure. For one thing, the technology will likely be sold to a large media provider like Verizon, so Intel is unlikely to lose much money on the experiment. Furthermore, it is a good sign that Intel's new CEO was astute enough to realize that Intel should not simply be chasing any type of business lines to gain more growth in the future.
Intel is not and will likely never be a media company. Intel is a semiconductor leader and that is definitely a large enough market for Intel to continue growing in. As it tried to diversify into other business lines it started to ignore its core business. As the PC industry contracted over the last years, Intel was slow to develop and market low consumption chips for the smartphone and tablet market. A huge opportunity to grow was ignored. Andrew Bryant, Intel's Chairman, recently said, "Intel seemed to have lost its way." But, with Krzanich as CEO, Intel will now be able to storm into this fast growing market and use its size, brand power and manufacturing clout to dominate the market.
Considering Intel's new focus, the company plans on leveraging the foothold it established in 2013, by quadrupling the company's tablet business to more than 40 million units. The company plans on bringing enterprise support and 64 bit processing, which has long been a shining feature of Windows based devices, to Android. And Intel will focus on making components for a wider variety of price points. The new Broxton chip series, expected in 2015, will be aimed at the higher end market, while the SoFIA chips, set for release in 2014, are intended for the value end, likely even for devices in the sub $100 range.
"It's very refreshing to see Intel make this move and could have important implications for the industry." -Raymond James analyst Hans Mosesmann
Intel will also have a renewed focus on expanding the presence of its chips in smartphones and other hand-held devices by actively promoting and developing products for large OEM manufacturers. Whereas the company had remained relatively idle as ARM Holdings (NASDAQ:ARMH), Samsung and Qualcomm (NASDAQ:QCOM) swallowed the smartphone market, the company sees strong potential to leverage its established relationships and introduce new chip to appeal to both consumers and device manufacturers.
And in another pleasant surprise, the company announced it would focus on expanding its small contract manufacturing business. While contract manufacturing is a low margin business line, it will help the company expand relations with device manufacturers and designers as well as perhaps drive down certain input costs for Intel's other product lines due to the company's increased buying scale. Due to the decline in Intel's PC business, factories are operating below capacity, and this new business line will serve to fill idle production and drive further revenue.
Furthermore, some analysts see the contract manufacturing expansion as a potential way to snag Apple (NASDAQ:AAPL) as a customer. Currently Apple has been using Samsung as a contract manufacturer, but considering the fact that Samsung is also one of Apple's largest competitors, that relationship has become strained in recent years. Intel may be positioning itself a a white knight - manufacturing iPhone and iPad chips to its highest quality standards while not having any competitive relation to the company. A potential deal with Apple would be worth tens of billions of dollars for Intel.
Intel, under the management of CEO Brian Krzanich is making all the right moves to refocus the company and target growth opportunities within its field of competence. While the Intel TV business line could have been interesting and potentially lucrative, it would also have been expensive to implement and hugely distracting. Investors should be applauding the news that the business line will likely be sold. The company is finally growing in the right directions and as revenue and profit increases, the share price should appreciate noticeably. 2013 was a turnaround year for the company. 2014 will show strong progress and results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.