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Don't Expect Big Things From Intel's Wireless Division

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If I had to compare Intel (Nasdaq: INTC  ) to an animal, I'd probably go with an elephant: A powerful beast that other animals would be foolish to antagonize on its home turf, but also a lumbering creature that's bound to have a hard time chasing down smaller, nimbler peers. Intel's elephant-like status in the chip world has been proven several times before through failed attempts to expand beyond its core PC/server microprocessor and motherboard chipset businesses, and its recent foray into the world of mobile phone processors, thrown into the spotlight recently with the announcement of the first Intel-branded 3G and 4G processing chips, might prove a similar experience.

Why Intel's getting into wireless
To a large extent, I can't blame Intel for making a serious effort to become a leader in the mobile processor world, using its recent acquisition of Infineon's Wireless Solutions division as a springboard. Intel's core businesses have matured to the point where they can't be counted on to deliver significant earnings growth over the long haul – especially not with average selling prices (ASPs) for desktop and notebook processors almost certain to continue their long-term decline. And over the next decade, there's a real chance that mobile application processors, which feature embedded processor cores from ARM Holdings (Nasdaq: ARMH  ) , will take a major bite out of Intel's earnings: both indirectly through the cannibalization of notebook sales by sales of tablets running ARM-based processors, and directly on account of Microsoft's decision to include ARM processor support with the next version of Windows.

Throw in the fact that Intel's home-grown efforts at cracking the mobile processor space using its Atom processor line were floundering -- Atom's chances of challenging ARM processor vendors through its support of Nokia's MeeGo operating system were shaky even before Nokia announced its deal with Microsoft -- and the Infineon deal seems a logical move.

Pitfalls abound
But turning the Infineon division and its ARM-based processor line into a big growth driver for Intel is fraught with some colossal (you might say elephant-sized) challenges. For starters, the bulk of the Infineon division's sales have come from the low end of the mobile phone processor market – usually, the chips either power less expensive "feature phones," or handle just the communications (i.e. baseband) processing tasks on smartphones such as Apple's (Nasdaq: AAPL  ) iPhone, while a stand-alone applications processor powers the operating system.

Applications processors such as the ones in Texas Instruments' (NYSE: TXN  ) OMAP and NVIDIA's (Nasdaq: NVDA  ) Tegra families often carry higher price tags than the baseband chips that they're paired with, and that can translate into higher gross margins. This is even more true for Qualcomm's (Nasdaq: QCOM  ) Snapdragon chips, which act as a dual threat to Intel's new division by combining baseband capabilities with heavy-duty applications processing.

Unless Intel becomes a major player in the applications processor market, which Samsung, Broadcom, and Marvell Technology (Nasdaq: MRVL  ) are also targeting, it can forget about its new wireless division turning into much of a profit generator. Not to mention that it will have no chance to head off the threat posed by ARM-based processors in the tablet and (eventually) PC markets.

And even in the plain-vanilla baseband processor market, Intel has its hands full dealing with a slew of competitors. While Texas Instruments' gradual exit from the baseband market (in order to focus on applications processors) is giving Intel the chance to gain share with Nokia, the company still faces plenty of heat from Qualcomm, Broadcom, ST-Ericsson (a joint venture between ST Microelectronics and Ericsson), Taiwan's MediaTek, and China's Spreadtrum Communications. Qualcomm is already causing problems for Intel by taking the baseband slot in Verizon's iPhone, thereby cutting into Intel's baseband sales for AT&T iPhone units. And MediaTek and Spreadtrum's chips are powering a flood of inexpensive phones from white-label Chinese manufacturers, which in turn are challenging Nokia and others in emerging markets.

Will history repeat?
Finally, beyond all of the tactical challenges that Intel faces in the mobile processor space, there's the simple fact that the company has historically done a poor job of attacking this kind of market. The enormous losses racked up by Intel's now-shuttered Communications Group during the first half of the last decade, culminating in (among other moves) the 2006 sale of its XScale/PXA applications processor business to Marvell, speaks to the trouble that "Chipzilla" can have when it steps outside of its traditional comfort zone. Intel seems to feel at ease only when defending its dominant positions in the PC and server microprocessor markets, where the company's massive R&D resources and unmatched manufacturing scale provide it with huge competitive advantages, and where a massive revenue base make it easy to justify an expensive cost structure. Or when it can use its manufacturing strengths to go after a commodity business such as flash memory.

But throw Intel into a market such as mobile phone processors -- where its R&D and manufacturing resources don't give it the same kind of edge, and where even the most expensive chips sell for only $30 or so (and are typically much cheaper) -- and the result has often been an inefficient business that loses money while failing to truly stand out from the crowd. Until Intel gives some reason to think that this time really will be different -- a Snapdragon competitor that gets designed into a high-volume smartphone or 3G tablet would be a nice start -- investors shouldn't expect much from the company's best-laid plans for an intensely competitive market.

Fool contributor Eric Jhonsa has no position in the companies mentioned. Intel and Microsoft are Motley Fool Inside Value selections. Apple and NVIDIA are Motley Fool Stock Advisor recommendations. The Fool has written puts on Apple. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Marvell Technology Group, Microsoft, Qulacomm, and Texas Instruments. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 16, 2011, at 1:35 PM, Netteligent09 wrote:

    Intel has an excellent strategic position, product roadmap, and direction with many winning formula in its pockets.

    Intel management and expertise are the best in business.

    When it comes to execution for new product and business, Intel failed miserably.

  • Report this Comment On February 16, 2011, at 2:58 PM, techy46 wrote:

    If Intel can successfully release their Medfield Atom SoC at 32nm and get some smartphone and tablet wins by Q3 2011 then taking that to 22nm should position them to compete head-to-head with Qualcomm, TI and other ARM licensees. If Microsoft can prroduce WP8 by 2012 for both ARM and Intel with versions for WP8 (phones) and WT8 (tablets) then the competition gets very interesting since all MS Apps (CRM, Excel, IE, Outlook, Powerpoint, etc.) will be smartphone ready. It was been interesting to see which, if any, processor wins. Historically, CICS has always ultimately beat RISC processors. Time will tell.

  • Report this Comment On February 16, 2011, at 3:09 PM, techy46 wrote:

    Another interesting angle, if Meego is delivered for devices other than smart phones (ie. cars) then it eliminates major industries from using Apple's, Google's or Microsoft's OS and then required licensing costs. This is a benefit to semi companies.

  • Report this Comment On February 16, 2011, at 3:16 PM, TheDumbMoney wrote:

    The expectations for Intel are already so low that I don't think anything said in this article really matters a whole lot, though it all is valid.

    The company has a 2011 projected P/E of 10.5 and a 2012 of under 10. It has an 11.5 TTM P/E. It has a huge wad of cash, and extremely low expecations for free cash flow, growth combined with tons of free cash flow, and significant free cash flow growth.

    I totally get every point in this article, but basicaly if INTC manages anything, anything at all in the next year, if it manages not to fall out the window while quickchatting its mistress, then by 2012 it will shoot up, or it will be even cheaper.

    In the meantime it has a well-above-average dividend yield of 3.38%, and zero or virtually zero debt. It's not sexy, it's not a Rule Breaker, it's not going to triple or be a "10-bagger" or whatnot, but yeesh, I'm not even kidding about this: if the company gets too worried about competitiveness, particularly if it took on some debt INTC could practically buy both ARMH and NVDA this year, at a fat premium, and still afford to take a nice Christmas trip to the Bahamas.

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