A cornerstone of the multitude of bear theses for Intel (NASDAQ:INTC) is that the company has been late to the party when it comes to tablets and that the current lack of offerings in the Google (NASDAQ:GOOG) Android tablet space is a serious omission. In the article, "Intel Is Terrified Of ARM" by Dan Naumov, the author notes that Intel's primary focus on tablets based on Microsoft's (NASDAQ:MSFT) Windows 8 indicates a fear of ARM Holdings (NASDAQ:ARMH). In this article, I hope to illuminate Intel's tablet strategy and show that Intel's actions are the result of strong strategic planning and not abject terror.
Why Windows 8?
The prevailing notion is that in the future, tablets will become the predominant form factor, taking the place of the traditional notebook "clamshell" for a number of customers. However, these tablets will likely be closer to the Microsoft "Surface" tablet, a tablet that can be, for all intents and purposes, a traditional laptop when necessary.
While specialized tablet-only operating systems such as Android and Apple's (NASDAQ:AAPL) iOS have seen successes (albeit Android tablets seem to only enjoy success in the low cost, firmly "supplemental" category), it stands to reason that for tablets to replace, rather than simply supplement, traditional PC form factors, there will need to be a unification of the operating systems and the software ecosystems.
Microsoft's big bet is that Windows 8 will provide the "best of both worlds" with the traditional "desktop" metaphor interface as well as the "Metro" UI that is much more geared towards touch. Given that Windows 8 will be compatible with all prior Windows software, and further given Microsoft's market-share in the PC space, Windows 8 really seems to be the best bet on a tablet transition.
Intel's Strategy Part #1: Facing The ARMy
Moving on to Intel's strategy, the firm has two primary horses in the race. On the low end, Intel is leveraging its "Atom" line of processors. These products will go up against solutions such as Qualcomm's (NASDAQ:QCOM) Snapdragon S4 Pro, Nvidia's (NASDAQ:NVDA) Tegra 3, and Texas Instruments' (NYSE:TXN) OMAP5.
Accordingly, Microsoft is providing a version of Windows, named "Windows RT", that is compatible with the ARM instruction set, as traditional Windows 8 is designed for Intel-compatible processors from both Intel and Advanced Micro Devices (NYSE:AMD). Some key points to understand about this version of Windows:
- Does not include Windows Media Player
- Includes Microsoft Office 2013 RT, a cut down version of Microsoft's "Office", for free
- Only "Metro style" apps will run on Windows RT
(so most Windows 7 applications will not run)
Presumably, Microsoft intends the Windows RT devices to be positioned to compete with the lower end Android tablets as media consumption devices while Windows 8 tablets will serve as potential netbook/low end notebook replacements.
If Windows 8 tablets built around Intel's "Atom" lineup are available at price points comparable to the Windows RT devices, then devices based on Intel's Atom will very clearly offer an advantage over all of the ARM tablets. Software compatibility is key, and if users at the low end of the spectrum are looking for netbook/notebook replacements, the Windows 8 offerings will be more attractive than the Windows RT ones.
However, if the Atom-based devices are significantly more expensive than the Windows RT devices (and this is very likely to be the case), then it will be a tough call on which devices will sell better. On one hand, the Windows RT tablets will be cheaper, but will users want to give up compatibility and functionality in an attempt to save a few bucks?
Intel's Strategy Part #2: Aiming High With Haswell
The other part of Intel's strategy in tablets actually has nothing to do with its "Atom" lineup at all. At the most recent Intel Developer Forum, the company unveiled its next generation "Core" micro-architecture codenamed "Haswell". This chip is a vast improvement over the existing "Sandy Bridge" and "Ivy Bridge" tablets in the low power arena.
While I will defer a technical deep-dive of why "Haswell" is such a huge deal to the fine piece at The Register (and if you're interested in getting geeky about the tech, feel free to start a discussion in the comments or shoot a message to my inbox), the bottom line is that on the CPU and graphics side it is even more powerful, power efficient, and battery-friendly than "Sandy Bridge" and "Ivy Bridge". In fact, the latest high performance CPU design from Intel will be suitable for tablets.
Now, while the Atom lineup will continue to see improvements going forward (the next generation "ValleyView" looks to be quite impressive -- expect a piece detailing the "Atom" roadmap in the near future), the implications of a high end "Core" chip inside of a tablet are quite exciting. Such devices would very distinctly blur the line between an ultrabook and a tablet. Now, these devices would likely be more expensive than comparable ultrabooks, but for a user looking for the very highest end tablet, offerings with "Haswell" inside will be appealing. The success of Apple's high end, high priced iPads has proven that there is a market for the "best".
Intel And Android: A Lot Gloomier In The Near Term
Despite rumors to the contrary, Intel's "Clover Trail" will also support Android/Linux. However, I do not expect Intel's efforts here to succeed quite as well as they will in the Windows space. While Windows RT is a gimped version of Windows 8 and could push consumers in the direction of the more fully featured, PC-like Windows 8/Atom based devices, Android is squarely ARM-based turf.
I see no competitive advantage for Atom here. I expect that system-on-chip offerings from Qualcomm, Nvidia, and Texas Instruments will be highly competitive (and probably faster/more power efficient than the current Atom, although I'll wait for benchmarks). Further, while Intel and Google have made significant strides to ensure compatibility of Android software with Intel's x86 chips, Intel faces the same problem with the "Clover Trail" Atom as it does with "Medfield" in the smartphone space -- it's simply not anywhere near "the best", so it will end up being just another system-on-chip in the Android space.
However, as I have alluded to earlier, Intel's Atom roadmap looks strong and I expect that the next generation of Atom chips, with a brand new microarchitecture and built on the latest manufacturing processes, will be very competitive. If Intel offers the best products, OEMs will choose them. It's that simple. In 2013, when the new chips hit the market, a re-evaluation of Intel's position in the Android space will be necessary. Until then, expect Qualcomm and TI to dominate the space.
In the aforementioned article, Mr. Naumov expressed the notion that Intel may be turning its back on Android to get in bed with Microsoft. I contend that Intel knows that its current Atom products are not particularly well differentiated in the Android world. Intel has no process advantage over the latest ARM based chips in this space, likely no performance advantage, and could even deal with some compatibility hiccups along the way.
Intel is, however, very well positioned in the Windows world, where full Windows 8 compatibility gives Intel an edge over the ARM-based competition that needs to run Windows RT. The main problem that I see for Intel here is actually from AMD, whose low power netbook/notebook chips have traditionally been faster than Intel's Atom. If AMD is able to leverage its graphics expertise and its more sophisticated low power cores in the tablet space, then that could be an issue for Intel.
Disclosure: I am long INTC, AMD, NVDA. 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.