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The PC market has been under substantial pressure over the last several years, due to the continued growth in tablets. While the traditional PC form factors won't go away, particularly for those in need of extremely high performance, others who would have considered lower end laptops for light use (particularly as secondary or tertiary devices) will probably choose to purchase tablets instead.
Why? They're cheaper, more portable, and better suited to a number of "consumption" tasks than a low end PC. With that in mind, Intel's (NASDAQ: INTC ) Kirk Skaugen, General Manager of the PC Client Group gave a very informative presentation at the Credit Suisse Technology Conference that gave a glimmer of hope for the long-term viability of the PC.
Record Core i5 and i7 shipments
For those of you unfamiliar with Intel's product stack, the high end product lines are branded "Core" and further differentiated with i3, i5, and i7 (in increasing level of performance). Below the Core i3 is the Pentium and below that is the Celeron. According to Mr. Skaugen, the company continues to see record Core i5 and i7 shipments.
That's not a typo; Mr. Skaugen explicitly stated that this wasn't just a record mix but absolute record volumes. This suggests that while the low end of the PC market is still very much under fire, the high end is doing extremely well. That means the "cannibalization" effect really is just hitting the lower end of the PC market.
Tablet cannibalization probably isn't so bad if Intel is doing the cannibalizing
When people think tablet cannibalization vis-à-vis Intel, the argument is usually, "consumers are replacing systems made up of $200 Intel chips with $20 ARM Holdings (NASDAQ: ARMH ) or Atom chips -- Intel is doomed."
Well, the average selling price for Intel's PC platforms (these are usually two-chip solutions -- the main CPU/SoC and the platform controller hub) is actually $100. If you take a quick look at Newegg.com (an online retailer for computer parts), it's not hard to find lower end Celeron or Pentium processors selling for as low as $50 (complete with retail box, fan, and retailer markup).
Now, do keep in mind that Intel also sells the platform controller hub (that is the "chipset") separately to the motherboard makers. But remember, the average selling price for a PC platform is $100, implying that the lower end of the PC market has a platform ASP of well under $100.
Assume that the platform ASP for a low end Celeron notebook is, say, $60 (that's $40 for the CPU, $20 for the chipset). Since the Celeron in this case is a "cut down" Core processor (i.e. disabled/defective die sold with fewer features enabled), it probably has a die size of about 93mm^2. On top of that, Intel is selling a second chip with a die size that's roughly 78mm^2 (although it is built on a very mature process so costs are lower).
All told, this amounts to at least 171mm^2 of silicon for $60. And, assuming that these low end parts make up about a third of Intel's PC shipments (this is an educated guess), this is about 86 million units' worth of low end PC chips that are at tablet cannibalization risk.
Now, while this may seem rather dire, do take note of the following:
- The tablet market has a total addressable market of 250 million-plus units and it is growing rapidly
- While selling prices for chips in this market run anywhere from $10 to $30, the die sizes are usually much smaller so the right chip design can still be healthy on a raw gross margin dollar basis compared to its low end PC peers
- The chips -- optimized for cost -- aimed at the tablet market, can be used to lower the cost of the low end PC parts (improving margin to compensate for unit declines)
Given the numbers above, it's not hard to envisage a scenario in which Intel sells more than enough tablet chips to offset the decline in the low end of the PC market. Also, it's probably fair to assume that the low end PC market doesn't go away, so eventually, there could be net growth here. Intel is expecting to sell at least 40 million tablet chips in 2014, and then it might double volume again in 2015 as it improves its product lineup, and builds trust with key OEMs.
Foolish bottom line
The core PC decline is not a pretty situation for Intel or its rival Advanced Micro Devices (NASDAQ: AMD ) , but the good news is that it's really the lower end of the market that's seeing these declines and the higher end, higher performance markets are actually still thriving. This indicates that PCs will probably bottom sooner rather than later and that since it's the lower end, lower ASP/margin chips are the ones getting "cannibalized".
Ultimately, the final damage from said cannibalization on the PC business may not be all that terrible for Intel. AMD, on the other hand, plays almost exclusively in the low end (and doesn't yet have a compelling tablet offering). So it's at a significantly greater risk.
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