Intel: Is a Second Act Possible?

Intel's (NASDAQ: INTC  ) latest earnings show a decline, with its biggest business segment, microprocessors for personal computers, showing no signs of growth. Industrywide, growth in sales of PCs has become flat, too, with similar reports emerging from other companies. What lies ahead for Intel?

Intel inside PCs, servers and data centers
Historically, Intel has been a supplier of microprocessors to manufacturers of computers in two markets: PCs and more powerful servers. An ingenious branding program contributed to its winning in the long run over rival chipmakers. The "Intel inside" sticker made Intel a company consumers recognized. Microsoft (NASDAQ: MSFT  ) sold Windows, the operating system, and Intel sold the chips in PCs. Consumers responded. The "Wintel" duo, as it came to be called, yielded spectacular results, creating a moat in the market for PCs that is now being challenged. Perhaps it's no coincidence that Microsoft is now also facing uncertainties, as growth in demand for PCs has stalled. 

In the market for servers, demand is growing with the rise of companies like Google (NASDAQ: GOOGL  ) . Google serves hundreds of millions of customers daily and runs data centers filled with servers in many parts of the world. Single-digit improvements in key components like microprocessors could have an impact on cash flow. With developments like cloud computing and big data, Intel is poised to continue delivering chips for things like servers and data centers. The long-term threats to this are alternative chip architectures for servers. Google, which buys a significant number of chips from Intel,  was reported to be contemplating this.

But not mobile
If we asked what comes next for a leading PC manufacturer, an easy answer would be to pivot into smartphones and tablets. These new markets show no sign of slowing down. At present, this is hardly a market for Intel, as its chip offerings for these segments have not really caught on. In this new party, Intel remains an outsider, while smaller players have found greater success.

This may be in part due to how this market operates. Tablets and smartphones are much smaller form-factors than PCs or servers. In addition, they almost always run on batteries because mobility is key to their utility.Design considerations for any component include a key line: Do more with less. The smaller a component and the less power it consumes, the better. Intel's historic markets never faced such constraints. As a result, Intel's capabilities to deliver adequate solutions to mobile markets may have been limited by a lack of flexibility to adapt to where growth has shifted.

Flexibility is the future
Can Intel develop another powerful consumer brand the way it did with its "Intel inside" PC business? That depends on if Intel can deliver solutions that consumers come to value as they did Intel PC chips. However, chips in smartphones and tablets don't command the same level of attention paid to the chips on computers years ago. Other considerations seem to drive purchases, such as price, operating system, and the apps available for the phone.

Is Intel flexible enough to change? Its historic strengths in engineering, miniaturization, and fabrication -- as well as distribution and long-standing partnerships with original equipment manufactuers, or OEMs -- could be put to other uses. Batteries, for instance, are screaming for disruptive innovation. Customers could come to value electric cars, smartphones and laptops with lasting batteries inside, if Intel can make them.

The Foolish bottom line
Andy Grove, the legendary CEO of Intel, spoke of strategic inflection points in his book, Only the Paranoid Survive. Intel has arguably missed one such point with the market's shift to smartphones and tablets. Can it reenact a shift like the one Grove describes when Intel moved from making memory chips to microprocessors? With Intel's current share price, investor expectations seem to have ruled out the possibility of its doing so.

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