Ultrabook An UltraFlop? Just 1 Of Intel's Problems

| About: Intel Corporation (INTC)
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The sales of Ultrabooks is not living up to the hype of previous expectations according to research firm IHS iSuppli. Ultrabooks are extremely thin and lightweight laptops based on Intel (NASDAQ:INTC) processors. The report estimates that only 10.3 million units in this category will be sold this year, less than half the 22 million it had predicted earlier.

The Ultrabook category was inspired by the MacBook Air by Apple (AAPL) which first launched in 2008. While the original model was underpowered and expensive, it did appeal to a niche market of those who could afford the price, and who appreciated the light weight (3 lbs.) and the fast, though limited, capacity, Solid-State Drive (SSD). Since then, more powerful processors and a steep drop in SSD prices have led to lower prices for the Air, and the line has become extremely popular. (One model currently is the #2 laptop on Amazon.) Still, they are not cheap computers, beginning at $999 for the 11-inch model.


By definition, "An Ultrabook is a higher-end type of subnotebook defined by Intel." The objective is to be (like the MB Air), thin and light. While they do have lower processing power than high-end notebooks, they are not necessarily the slowest machines available.

Last year, Intel set up a $300 Million fund to promote the design, trying to combat the loss of share to the tablet computers such as the iPad, most of which are built with competing ARM-based (NASDAQ:ARMH) processors. (Apple's MB Airs also use Intel processors.)

So why have they failed to meet expectations? The report by iSuppli suggests both marketing and price. It suggests that consumers are not properly educated as to the category. "So far, the PC industry has failed to create the kind of buzz and excitement among consumers that is required to propel ultrabooks into the mainstream," it says.

Additionally, iSuppli points to pricing. It claims that current prices are in the $1000 range (and up) and must come into the $600-700 range. Although it does predict a steep rise in sales next year, it continues to say:

If not - and ultrabooks stay at the $1,000 level - their sales will continue to struggle in 2013 as they must compete against lower-priced options, such as tablets and smartphones.

Many have found it strange that no one seems to be able to build an ultrabook with specs that are comparable to the MacBook Air that can compete with it on price. It is such a turn from the long standing meme that Macs are more expensive. In this case it appears to be turned on its head - at least for the time being.

Whatever the causes, the sales have been less than expected, and there is no sure improvement in the future.

What does this mean for Intel?

On Sept. 7, Intel lowered its third quarter revenue outlook, saying: "Relative to the prior forecast, the company is seeing customers reducing inventory in the supply chain versus the normal growth in third-quarter inventory; softness in the enterprise PC market segment; and slowing emerging market demand."

With tablets expected to sell a phenomenal number of units - IDC projects over 260 million for 2016 - it is clear that this will affect the traditional computer market, and if most of these tablet computers are running ARM-based CPUs, then this will negatively affect Intel's sales numbers. This will lower revenues not only directly, but would likely put a strong downward pressure on prices and therefore margins.

Intel has responded with two efforts. There is the Ultrabook project, designed to increase sales of the traditional, more powerful CPUs in a new, and hopefully attractive, package. This appears to be faltering severely, as discussed above.

The second initiative is Intel's investment in its Atom CPUs. These are processors that run the same x86 instruction set as their high end processors, but are designed to run on very low power requirements, and so are suitable to mobile products. The instruction set allows for the easy port of Microsoft Windows operating system, and it has been targeted for their new Windows 8. Several products have been announced recently using the Atom, although many are not yet available. [Note: when I refer to Win8 I mean any of the various flavors of Windows 8 for standard computers, tablets or smartphones.]

A major problem now with the Atoms is Windows 8. First of all, it is still not released. Another issue is that on Sept. 26 Bloomberg reported: "Intel Corp. Chief Executive Officer Paul Otellini told employees in Taiwan that Microsoft Corp. (NASDAQ:MSFT)'s Windows 8 operating system is being released before it's fully ready, a person who attended the company event said." [emphasis added]

In a rush to get it out for the holiday season, Microsoft may be cutting corners. Users will put up with a certain degree of problems in a new OS, but if they get to be too many or too annoying, or if they are not fixed soon enough, then it can spell doom for the product. Gartner Research has recently noted that Microsoft is taking a big gamble with Win8 - but a necessary one. If it cannot pull it off successfully, it will most likely continue to lose share to Apple.

In other words, while there may be some implementations of Android on Atom devices, for the most part they run on ARM hardware and this is not likely to change. Therefore Intel's hope in the mobile space depends largely on Win8.

It is easy to be bullish on Intel. It is a great firm. But it is in a slide. It will never go away, as there will be a need for more powerful computers - both personal and servers - for the foreseeable future. However, it is also tied to the success of Win8 - something over which it has little control. If this fails, then Intel will also see a serious realignment of its future prospects.

Disclosure: I am long AAPL. 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.