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Intel’s Mobile Chip Push Is Finally Succeeding — and That’s Not Good for Investors

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Intel (INTC) showed this week that it’s finally ready to compete in the fast-growing markets for smartphones and tablets. But for Intel investors, succeeding will be almost as bad as failing.

As phones and tablets replace PCs and laptops, Intel must replace sales of chips that it sells for hundreds of dollars with chips that sell for one-quarter to 1/10 that amount. And, sorry Charlie, they aren’t going to sell 10 times as many.

PC sales are in a tailspin, projected to drop 8% or more this year as tablets jump almost 60% and smartphone sales increase 40%, according to global market tracker IDC.

Intel drops, ARM soars

Intel sells almost all the chips used in PCs. Mobile devices, however, rely on lower-performing but battery-sipping chips licensed from designs by ARM Holdings (ARMH). Amid falling PC sales, Intel's revenue dropped 4% to $25.4 billion in the first half of the year. And in the chip game, where economies of scale rule, that modest drop in sales ended up as a 27% drop in net income to a still substantial $4 billion. No coincidence, then, that Intel's stock price has dropped 2% over the past year while ARM's has shot up 80%.

Until now, Intel had nothing to beat ARM chips, which cost little and draw very little energy in battery-powered mobile devices. Its chips mainly powered late-to-market and unpopular Windows 8 tablets, while ARM dominated on Apple's (AAPL) iPad and iPhone along with almost all Google (GOOG) Android devices.

But at its developer forum in San Francisco this week, new CEO Brian Krzanich and his crew emphasized the incredible performance of a new line of low-power chips dubbed Bay Trail. Intel also showed the fruits of dedicating 1,000 engineers to an Android compatibility push. The end result was a bunch of snazzy new mobile tablet products coming from top vendors such as Samsung (005930.KS), Hewlett Packard (HPQ) and Toshiba.

The problem is that, even if Intel’s new Bay Trail line grabs big market share among the 229 million tablets – versus 322 million PC – the equation won’t add up. It might take chip sales to nearly the entire tablet market just to replace the 30 million of lost PC chip sales this year. And in the 1-billion-a-year smartphone market, Intel remains invisible, lagging on adding the core capabilities phone vendors need.

Intel's new effort to get inside everything from smart watches to industrial air conditioners, a tiny chip line called "Quark," is even more speculative.

That’s not to say Intel hasn’t created some mighty impressive processors. Intel blanketed its developer forum this week with a stream of seemingly endless innovations and new products.

Plenty of flash

A beautiful model strutted along a virtual catwalk, a kid played with a three-dimensional, on-screen butterfly and realistic reflections glinted off whizzing cars in a racing game running on a 7” tablet. All were enabled by the massive increase in processing power in the Bay Trail chips.

The company’s multi-billion dollar mobile chip push finally looks ready to make big gains – its newest chips, fabricated with cutting edge 22 nanometer technology, appear to outperform the competition while drawing less power.

On one benchmark for Android media editing tasks, a tablet running with a Bay Trail chip finished 2.17 times faster than a tablet running Intel's prior Clover Trail generation of chips. A tablet running an NVIDIA (NVDA) Tegra 4 was only 1.64 times as fast and a Qualcomm (QCOM) Snapdragon 800 system scored 1.46.

Another test showed an Intel tablet using 38.5 watts per hour playing back HD video while an iPad and its ARM-based chip performing the same task drew 42.5 watts.

The tests also served to demonstrate just how far Intel's last generation was behind the competition. And the competition obviously will have its own next-gen chips in the market soon, too.

Another risk lurking in the weeds for Intel is the prospect of losing ground in the PC market even as it gains in the mobile world. Apple announced that its homegrown A7 chip, based on ARM designs and powering its new iPhone 5S, will have the capability to run 64-bit software, a step up from current mobile chips that can only run 32-bit software.

But the main attraction of the additional bits is to address more RAM, more than 4 gigabytes. However, neither the new iPhones nor any other portable devices on the market include that much RAM. Most have 2 GB or less. It's personal computers and laptops that use more than 4 GB. And that has generated widespread speculation that, sooner or later, Apple may converge its mobile and Mac lines on its own chips, jettisoning Intel.

Perhaps as a hedge, Intel was also pushing new chips for Google Chromebooks. The mostly low-end laptops run Google's web-based Chrome operating system. They typically cost less than Windows and Mac laptops and can be easier to maintain. The new Intel-based Chromebooks don't use Bay Trail chips, but a more expensive line known as Haswell meant and – priced – for more-powerful computers.

Google's head of Chrome and Android, Sundar Pichai, made a surprise appearance at the developer forum to tout four new Intel-powered Chrome devices. The spread of Chrome devices will be "hugely disruptive in the market – a tipping point," he predicted.

Intel is trying to get positioned for that tipping point. But even if it does, the result may not be enough to sustain the once dominant chip maker.

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