At Intel's (NASDAQ: INTC ) most recent investor meeting, the company expressed its intention to take its current-generation Bay Trail system-on-chip into the low-end/value segment of the tablet market. That's despite a bill of materials that is too rich for those lower-end segments, thus leading to the need for contra revenue to subsidize the bill of materials. The question that investors want to know is why Intel is so aggressively going after cheap tablets. The answer, believe it or not, is that this is where all of the volume is.
It's all about volume
At the Intel Developer Forum held in September 2013, Intel presented the following slide in one of its technical sessions:
If you examine the slide for a moment, it becomes clear -- at least in the Android tablet market -- that the mainstream/high-end adds up to about 33% of the total addressable market, or TAM. The rest of the market, from value downward, comprises the remaining 67% of the TAM, a pretty significant chunk of the Android tablet market. Further, much of the higher end is locked up by Samsung (NASDAQOTH: SSNLF ) , which may not be amenable to using Intel's current-generation tablet products -- as Samsung's own Exynos is arguably better today.
While Intel's goal of 40 million tablets for 2014 may seem lofty, take a look at the following foil:
If Intel grabs 90% of the Windows tablet market in 2014 -- roughly 21.6 million units -- then it doesn't actually have to make a whole lot of headway into the Android space. With about 18.4 million Android units, it could hit the baseline of that target. This would represent just 13.3% of the Android tablet market. Given how aggressively Intel will be pushing into the value space -- Bay Trail, with the bill of materials contra revenue, should be very competitive -- it would seem that Intel should be able to easily exceed that 40 million-unit baseline.
What is the upper end of Intel's potential tablet penetration?
Keep in mind that Intel faces some pretty stiff competition from both Qualcomm (NASDAQ: QCOM ) and NVIDIA (NASDAQ: NVDA ) , particularly at the high end of the market, which represents roughly a third of the entire Android tablet market. Intel also faces intense competition from low-end juggernauts such as Rockchip, Allwinner, and MediaTek, particularly in Asia -- not to mention Qualcomm.
The 13.3% Android share that Intel's 40 million-unit goal implies isn't anything to sneeze at. But for a company with $53 billion in annual revenue that's looking for growth as its largest business segment stagnates/declines, this isn't enough over the long term. Intel will eventually need to own 30-40% of the non-Apple tablet market to really move the needle, and it would be preferable for the company to have an even-bigger market presence in the high-end/higher-margin segments.
Is that number achievable over the next few years? Quite likely, particularly if Intel uses its manufacturing lead to really pull ahead on cost at the low end and performance at the high end. But it will also require some pretty robust execution for the company to pull it off profitably. It'll also take some key wins, such as the Nexus 7 -- currently owned by Qualcomm -- or Kindle Fire HD/HDX -- also owned by Qualcomm. It wouldn't hurt to see Microsoft pull the plug on Surface RT and equip it with a Cherry Trail, 14-nanometer chip later this year.
Foolish bottom line
The market is there for Intel to take share. But it will be a rather bloody battle that will require great execution on Intel's part. With Qualcomm, NVIDIA, MediaTek, as well as foundries Samsung and TSMC, moving fast, Intel needs to move faster. That said, the company's 40 million-tablet goal should be fairly easy to achieve.
Iit's getting a bigger slice of the pie -- one that really matters -- that will be tougher.
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