After decades at the center of Silicon Valley, Intelis now struggling with one of the technology industry's oldest lessons: beware the cheaper, "good enough" competitor. For years, Intel executives scoffed at potential threats to its computer chip business from makers of less expensive chips for video games and mobile phones. The largest maker of chips, Intel continued to focus on putting those chips in personal computers, where they could be sold at a high profit margin.
That strategy appears to have run its course. The quality of mobile and gaming chips made by other companies has improved to a point where they run most of the world's mobile phones and tablets. And partly because more people are turning to those mobile devices, PC sales are waning.
The move to mobile devices started to hurt Intel's results in recent quarters, but the quarterly earnings that the company reported Wednesday were particularly stark. Net income was $2 billion, or 39 cents a share, a drop of 29 per cent from a year earlier. Revenue was $12.8 billion, down 5 per cent.
Intel's results were slightly below expectations. Analysts had predicted 40 cents a share and revenue of $12.9 billion, according to a survey of analysts by Thomson Reuters. Intel cut projections for annual revenue, gross margin and research and development.
"At the end of the day, the market will go where the market goes," Brian M Krzanich, Intel's chief executive, said in a call to analysts after the earnings were released. "We've not always lived up to the standards we've set for ourselves."
Krzanich, who took over in May, has previously said that Intel was slow to see the threat from tablets and smartphones. On Wednesday, he said that organizational changes, along with a renewed commitment to looking for "the next big thing," would bring Intel back.
In the near term, this means going after the lower end of the PC and tablet market. A new chip will be out in time for the Christmas season, he said, in notebook-type computers that will be sold for as little as $300 and tablets costing $150. Intel also has plans to soon put new chips in higher-end touch-screen devices.
"He's got to manage in a very tough environment," said Douglas Freedman, analyst with RBC Capital Markets, referring to Krzanich. "Intel has done a good job showing they can make chips for mobile devices and tablets, but in the next three or four quarters he has to show he can bring that home."
While chips for PCs still make up almost three-quarters of Intel's revenue, few analysts expect thePC market to recover to its old highs. Last week, International Data said that PC sales fell 11.4 per cent in the second quarter of the year. Most of the developed world is now saturated with the machines, and people are buying replacement computers at a slower rate.
Krzanich said Intel would "leave no computing opportunity untapped" to make up for the loss. In particular, he said, Intel's "highest priority" would be small mobile devices.
Krzanich has also focused on cost-cutting and streamlining at the company, giving Freedman and others some hope that Intel's profit will rebound.
In Wednesday's call, the company noted that Microsoft's Surface Pro tablet, which carries a high-margin Intel chip, was not counted in the PC sales numbers by IDC and others. The analysis firm has said, however, that in the first quarter of this year Microsoft's tablets, including tablets not carrying Intel chips, had just 4.4 per cent of the tablet market, compared with 39 per cent for Apple's iPad. There is little to suggest significant improvement from there, an IDC analyst said.
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