Intel Sees Benefits, Challenges in Tablets, Smartphones

Intel has yet to play a major role in the exploding tablet and smartphone spaces, but the Web traffic generated by these devices is fueling strong growth in its enterprise server business.

Intel is yet to be much of a player in the booming tablet and smartphone spaces, a concern for industry observers in the long term. However, for now the burgeoning markets are helping drive demand in some of Intel's traditional businesses, and company executives continue to promise a strong presence in both device segments as 2011 rolls on.

During a Jan. 13 conference call with analysts and journalists announcing the chip maker's record fourth-quarter and full-year numbers, CEO Paul Otellini said Intel will become a muchlarger player in both tablets and smartphones. In tablets, Otellini said he expects a host of Intel-powered devices to hit the market this year.

A key differentiator for Intel over rivals who use ARM or MIPS designs is that Intel's Atom platform can run Microsoft's Windows 7 operating system, Google's Android and MeeGo, jointly developed by Intel and Nokia.

"By designing Atom-based tablets, [OEMs] have the opportunity to run multiple operating systems on it, which I think is unique to Intel," he said.

Otellini also reiterated that he expects smartphone designs powered by Intel technology to hit the markets this year.

Intel had a record fourth quarter that topped off a very strong 2010 that saw it bounce back from the global recession thanks in large part to its enterprise business, which helped buffer it against weakening consumer PC demand. In the fourth quarter, revenue came in at $11.5 billion-up 8 percent over the same period in 2009-with net income hitting $3.4 billion, a 48 percent jump.

For the year, Intel's revenue came in at $43.6 billion-the first year the company has generated more than $40 billion in revenue-a 24 percent increase over recession-ravaged 2009. Net income was $11.7 billion, 167 percent over the previous year.

Still, the bulk of that came from Intel's traditional PC and server businesses, and executives are anxious for the company to become a larger player in rapidly expanding markets like mobile and embedded devices. Though the dominant chip maker in the world, with more than 80 percent market share, Intel still has made few inroads into these areas that currently are the domain of ARM Holdings, whose designs are used by such vendors as Qualcomm and Samsung.

Intel has looked to expand into these areas through internal development-particularly of its Atom platform-and external acquisitions, such as its proposed $1.4 billion purchase of Infineon's wireless business, which Otellini and CFO Stacy Smith said should close this quarter.

However, while Intel makes its push into the mobile space, the rise of such devices as tablets and smartphones is helping fuel the company's strong server chip business, Otellini said. In 2010, about 245 exabytes of traffic crossed the Internet, he said. Over the next five years, 1 billion more people will get online and 15 billion more connected devices-from smart TVs to smartphones to tablets and PCs-will link into the Web, with traffic growing to more than 1,000 exabytes.

This is all driving the need for more servers to handle the traffic, Otellini said, pointing out that the company's data center group saw quarterly revenue rising 15 percent over the third quarter, and yearly revenue jumping 35 percent over 2009.

"The world of PCs plus new emerging computing devices is increasing the demand for servers of all types," he said.

Greg Richardson, an analyst with Technology Business Research, said the trend will continue to help Intel.

"Mobile devices, such as tablets and smartphones, are leading to an explosion in data and volume, resulting in growing demand for cloud and virtualized infrastructures," Richardson said in a research note. "Intel capitalized on the increased demand."

Intel's enterprise business will reap benefits from the tablet space, he said. The chip maker will be able to use its commercial presence in both servers and PCs to "establish a toehold in the business tablet space," Richardson said. Intel's server and storage businesses also will capitalize on the skyrocketing Internet traffic, particularly in such areas as virtualized and cloud-ready servers.

However, he warned that Intel is missing out by not being a larger player directly in the tablet space, which was revived by Apple and its iPad last year. Since April 2010, more than 10 million consumers worldwide have bought a tablet.

"The rub: To this point, these devices have been built on architectures that don't belong to Intel," Richardson said.

Intel will try to gain traction in the space with its upcoming "Oak Trail" Atom platform, but the company also must be able to quickly learn to play in such a lower-priced consumer device space, which is a different market from traditional servers and PCs, he said.