Intel (INTC) and Microsoft (MSFT) are both under threat from a shift from personal computers (PC) to tablets. Each is likely to go its own way, splitting up a duopoly that has dominated computing for over two decades.
Tablet sales are eating into PC sales.
Perhaps the biggest reason why PC sales are falling is the quickly growing tablet market. [Michael Fowlkes, Market Intelligence]
It isn't that hard to figure out why. Tablets have many advantages:
- Instant 'On'
- Can function roughly 16 hours on a single battery charge
- Is light and portable
- Has a magnificent full HD (1920x1080 or beyond, in case of the iPad) super IPS screen
- Build in 3G and 4G
- Functions as a entertainment tablet as well as PC substitute
- Costs a mere $500-600
Yes, we are aware of the disadvantages. The screens are small. They don't work with much of the existing Windows software. While for consumers this isn't much of a problem, for businesses it is. But even here, new business applications are developed daily.
We argued in two previous articles that Intel and Microsoft are the two companies that stand most to lose from the slow cannibalization of PCs by tablets, as these are the companies that dominate the areas that adds most value to PCs and enjoy the highest margins.
Both companies have a rather marginal position in the tablet market right now, but they're not giving up without a fight. Their main problem is that in tech markets, first mover advantage can be extremely important. This is more a problem for Microsoft than for Intel.
Intel's problem is that tablets (and mobile phones) have been running on chips based ARM (ARMH) designs. ARM Holdings is a chip designer that licenses to companies like Qualcomm (QCOM), Nvidia (NVDA), Texas Instrument (TXN) and Samsung (SSNLF.PK). The main advantage of these designs is their energy efficiency.
So far, Intel's energy efficient chips, the Atom family chips, have been no match for the ARM designs, but Intel is the world's largest chip company with numerous capabilities so there isn't any guarantee that it will lag ARM forever. For instance, at present, Intel is the only company that can produce chips with a 22 namometer process technology. The smaller the circuitry, the more powerful the chips become, but also the more energy efficient.
Another advantage of Intel is its 'tri-gate' transistor technology:
The 3D or "tri-gate" transistors are important because they are the first significant move away from the planar transistors that have been used in the semiconductor industry for decades. With this technology, the gate wraps up and around a vertical channel through which current flows when the transistors are switched on. This should enable better performance at lower power than standard chips. [PCMag]
According to PCMag, Intel "seems to be years ahead in commercial production," and while the competition is struggling with producing 22nm chips, Intel "has already started building factories for 14nm production."
And now Intel is combining these two technologies in its new Ivy Bridge processors. These are finally out after some delay. However, so far we haven't seen the chips they're gong to produce with these technologies are all for servers, PCs and laptops (but finally including support for USB 3.0, that was a long wait!), but that is likely to come:
Intel executive Kirk Skaugen noted that the company's upcoming chips are "Retina display capable," a reference to the Apple-branded, high-resolution display on the new iPad. [Damon Poeter]
It's a bit of a curious remark for chips that are highly overpowered for a tablet, so they're possibly more targeted at rumors that the next Apple MacBook Pro lineup of laptops will sport super retina displays with 2880x1800 resolution
Fellow Seeking Alpha contributor and technology buff Dana Blankenhorn praised the graphical qualities of the new chips. Indeed, these seem to be twice as powerful as the previous generation of Intel chips ('Sandy Bridge'). According to Blankenhorn, that should "take market share from long-time rival AMD (AMD).
Perhaps, but according to PC Magazine, "Ivy Bridge still looks notably behind AMD's integrated Fusion A-series (Llano)." AMD isn't sitting still either and will soon come out with the Radeon chips.
Intel's big push is for 'Ultrabooks,' very thin and light, yet fully featured laptops. These post perhaps the best challenge for tablets, as they have the conveniency of a laptop with the near portability of a tablet. However, they're more expensive and still less energy efficient. Intel's prognostication that ultrabooks will make up 40% of the laptop market are highly overblown, reality is more like 10-20% [NRC Handelsblad]
Well, there might be cheaper "ultrathin value notebooks," but these are more likely to be based on AMD or even ARM based processors:
The Windows on ARM (WOA) crowd also wants in on the ultrathin value notebook action. Although most WOA deployments will be in tablets initially, we will see a few clamshell-based models by the end of the year. Windows RT applications for use on WOA machines will be scarce at first, but Microsoft will include a full version of Office to help jumpstart demand for Windows laptops using ARM processors. [Tim Bajarin]
We'll have to see how the latter fare though.
Intel's best chance lies in the Medfield processor, the one that takes on ARM at its own game. It's already in a phone for the Indian market (produced by Lava International), and five different customers (Orange, Motorola Mobile, Lenovo and ZTE) have ordered the chip. Intel predicts that
in the next five years, Intel will become an important participant in the market of the smart phone chip. In the past 10 years, Intel's several attempts in this market have failed to succeed. [Mobile phone ezinemark]
Intel's track record in this space suggest success isn't guaranteed and the chips are basically the Atom chips from netbooks, a category that has basically been wiped out by tablets and their own limitations.
But Intel argues that they perform well in phones and tablets:
Microsoft has a bigger mountain to climb as the tablet space it is competing in has two established software platforms already, Apple (AAPL) and Android. The problem is that these platforms already have a wealth of applications developed for them, exactly the reason why Microsoft was able to have such a stranglehold on the PC market for so long.
It is difficult in markets that benefit from standards to catch up with platforms that are already well entrenched standards, even if you are Microsoft. How difficult this is can also be gauged from the smartphone market, where Microsoft faces the same two foes in Apple and Android.
Microsoft has developed a worthy phone software platform that runs on a flagship Nokia phone (the Lumia series). However:
The report has come back that Nokia Lumia handsets, such as the Nokia Lumia 800, Lumia 710 and Lumia 900, aren't selling and simply aren't good enough to overhaul the Android and iPhone dominance. "No one comes into the store and asks for a Windows phone," said an executive in charge of mobile devices at a European operator, which has sold the Lumia 800 and 710 since December. [Edward Chester]
The problem isn't the phone, apparently:
Indeed one executive said that "If the Lumia with the same hardware came with Android in it and not Windows, it would be much easier to sell." [Edward Chester]
And all this despite some good reviews. It just shows new platforms need to be considerably better than the ones that are already established if they want to get a significant piece of the action.
The new Windows 8 operating software is a bit of a gamble though, according to Dan Costa
Microsoft risks alienating its traditional base of desktop and laptop users. Because, as cool as Metro [the tile interface] is, it kind of sucks without a touch screen.
It's awkward to use on a laptop or desktop without a touchscreen. A possible remedy would be to bring back the start button, but it doesn't seem like Microsoft is going to do that, in an effort to force users onto the new paradigm. There are third party applications with start button functionality available, but we will have to see how that develops.
Michael J. Miller from Forward Thinking is pretty pessimistic:
For desktop users, I would like to see an option to go back to the old-style Start menu (which I doubt Microsoft wants) or at least some changes to the new Metro-based Start menu that would simplify some common desktop functions. But when all is said and done, I don't think enterprises will move to Windows 8 for desktops and traditional notebooks no matter what Microsoft does. Almost every large organization I've talked to thinks Windows 7 is an excellent client operating system. Almost every one of them has either just completed, or is still in the process of, a migration from Windows XP to Windows 7. Despite the fact that it's a great operating system, the move to Windows 7 wasn't easy: There are changes in how it works that have forced retraining. Every large organization has found some application here or there that has needed to be updated or replaced. Many enterprises have no interest in making another jump anytime soon.
He also argues that iPads have made a big impact, and all large enterprises he knows are figuring out how to work with them, but they would prefer a Windows tablet. Which opens up possibilities for Windows tablets on ARM based chips (WOA). However, the Windows 8 version for ARM based processors is also very much a work in progress:
Windows RT is the third version of the product. It's built specifically to run a faux-Windows on the ARM chip. It should not be named Windows at all. You cannot run any x86 code on it and it's designed specifically for tablets [John Dvorak]
So at least in its first iteration, it doesn't seem at all suitable for business applications.
The truth is, both Intel and Microsoft are playing catch-up. Intel seems somewhat better placed than Microsoft though. The bigger Apple's lead becomes, the more difficult it will be for Microsoft to make a significant dent in that position, whilst Intel chips, once they match ARM based chips in energy efficiency (they are close) can still hope to even win Apple as a customer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.