Intel (INTC) is the largest and one of the best-known makers of computer processors, and has dominated the personal computing business for decades. Unfortunately for Intel and its shareholders, the company has largely missed out on the touch-screen revolution that has taken place over the last five years within the smartphone and tablet markets. It finally appears, though, that Intel has found a way to compete in the touch-screen market.
Intel is now betting that standard supply and demand characteristics may be its saving grace, and that coming growth in touch-screen demand will soon run into the supply restrictions for touch screens. This is particularly the case now, because not only will smartphone and tablet proliferation continue to accelerate, but also a coming integration of touch screens into laptops will only further hasten touch-screen growth.
To prepare for this coming touch-screen bottleneck, Intel has contracted with multiple touch-screen makers in order to secure supplies of the essential component, including Cando, HannsTouch, TPK and Wintek. This move is not only for the benefit of Intel, but also Intel's partners such as Dell (DELL) and Hewlett-Packard (HPQ), both of which have also suffered from the recent mobile device revolution largely powered Apple's (AAPL) iOS and Google's (GOOG) Android OS-based smartphones and tablets.
Under Intel's agreements with these touch-screen makers, they will provide screens to laptop makers as stated by Intel, which did not provide any specific details as to how many such screens might be going to any particular maker. Intel will not pay for the screens that are distributed to those laptop makers, but it will be responsible for any unused capacity held by the screen manufacturers. As such, the touch-screen makers that contracted with Intel have virtually no overhead risk in the short term, because either Intel's partners will buy the inventory or Intel will.
It can be difficult for these traditional personal computer maker share leaders to compete against these new titans of technology. This is so because of the traction iOS and Android have with both consumers and suppliers. Currently, Apple and Samsung, the largest maker of Android-powered devices, together control a majority of the smartphone and tablet markets.
Simply put, without Intel securing supply chains, hardware suppliers would likely give Apple and Samsung preferred status with their touch-screen enabling components, stranding companies like HPQ and Dell that primarily sell Intel powered products running Microsoft's (MSFT) Windows OS. In the second half of 2012 it is expected that several hardware makers will unveil ultrathin and touch-screen enabled laptops running on Windows 8, as well as tablets and smartphones that will also utilize the Windows 8 OS.
Over the next few years, tablet growth is expected to be substantial enough to make the tablet market larger than the laptop/notebook market. Touch-enabled smartphone growth is also still quite strong, though the younger tablet market is currently growing at about twice the rate of smartphones. Intel and companies like Hewlett-Packard and DELL have largely been left out of these fastest growing technology hardware markets, and also seen their share or the computer market decline. Such declines have not only hit their market share, but also their equity shares, with HPQ shares down over 45 percent in the last 12 months and DELL's down about 27 percent through the term.
Sadly, for Intel, it was Apple's first choice as a processor for its iPhone, but failed to take advantage of that inclination. Apparently, Steve Jobs had a general preference for Intel processors, but Intel's processors were not designed to handle the touch screen interface that the phone pioneered five years ago. As a result, Apple's initial iPhone was designed to run on processors using ARM Holdings (ARMH) technology. The initial iPhone models used an Apple branded ARM 11 processor that was manufactured by Samsung, and the 3GS model upgraded to a Samsung ARM Cortex A8 processor. Apple's iPhone 4 was further upgraded to an Apple branded A4 processor, with the 4S and iPad 2 using an A5 processor, and the iPad 3 using an A5X processor.
One interesting thing to note is that Samsung has not only been one of Apple's biggest competitors in the smartphone and tablet markets, but also one of its primary hardware suppliers. This dual identity as both a strong market competitor and a crucial supplier to its competition has placed Samsung in an enviable position, but one that is not likely to last forever, especially as the companies continue to sue each other in a series of global patent disputes. Given Apple's prior preference for Intel architecture and the company's probable desire to eliminate its future dependence upon parts from competitors, Intel may some day acquire this highly desired business from Apple. Such a turn of events would certainly be a big boon for Intel.
Disclosure: I am long INTC.
