Intel's Desktop Strength Is Encouraging

While the notebook PC has been in free fall, there are a number of very encouraging data points for the company's desktop PC chip business.

Feb 18, 2014 at 7:05PM

Intel (NASDAQ:INTC) seemed to forget over the last several years that Moore's Law exists so that computing can be pushed profitably into lower-cost, higher-volume markets with each and every technological breakthrough. Over the years, Intel had actually abandoned real focus on the low-cost, low-end PC markets, opting instead to try to drive increases in average selling prices, or ASP, through additional integration and process shrinks. While this drove record revenue and margins in 2011, the strategy began to collapse in 2012, as tablets became much more popular.

It's always about making 'em cheaper
The unfortunate thing about trying to own the highest-ASP, highest-margin segments of an industry and seemingly forgetting about the rest of it is that you miss out on a ton of unit volume growth. This is what happened to Intel in the PC. Yes, Intel's mix has been getting richer, and yes, the company is seeing record shipments of its highest-end Core i5 and i7 processors, but the low end has eroded significantly thanks to the advent of tablets.

While Apple (NASDAQ:AAPL) commands premium prices for its iPad Air and iPad Mini with Retina Display, this isn't what's really disrupting the PC. Apple simply opened the doors for cheap ARM-based tablets to disrupt the computing market. The problem is that the low end of the PC market -- filled with bulky designs with bad screens, short battery lives, and large weights -- had become stagnant while tablets offered great experiences and ever-increasing functionality. That's why they continued to win wallet share with consumers. And, for the first time, that "old" laptop seemed "good enough" to last a little while longer.


(Source: iMore)

The notebook is being squeezed...
According to Intel's most recent report, notebook platform volumes declined 4% from 2012 to 2013, with the pain compounded by a 4% decline in platform average selling prices. Desktops, on the other hand, looked a lot better with average selling prices up 6% year over year, and units down only 2% from 2012 to 2013. Not only does it look like the desktop is stabilizing at a quicker rate than notebooks, but it looks like there is a really positive ASP trend, implying that users are buying a richer mix of products.

Why is this happening? The simplest explanation is that as tablets become the mobile-computing form factor of choice for many consumers -- i.e., those without the high mobile performance needs of a business user or a power user -- there is very little need for both a notebook and a tablet. However, these people still likely want to do PC-oriented tasks, such as typing word documents, editing spreadsheets, playing games, and so on. That implies a need for a setup such as a tablet and an all-in-one PC.

The desktop is becoming even more ubiquitous
Consumers don't seem to be tripping over themselves to pick up a high-priced Ultrabook or 2-in-1 convertible -- although cheap ones like the ASUS T100 sell well. But they seem to be OK with buying a richer mix in desktops, likely due to the fact that desktops are used by many people within a home and are often expected to last longer. However, what's interesting is that Intel is also driving down the prices and driving up the innovation and convenience with products like its NUC, short for Next Unit of Computing.

You can pick up a Bay Trail-M-based NUC for $140 or so, buy some cheap memory and storage for it, and for about $200-$250 have a very convenient, portable desktop system. Further, while the performance of these systems isn't going to set any records, they're more than capable for web surfing, video streaming, light productivity use, and even light gaming. In short, these types of devices help make computing more ubiquitous and help Intel drive some real incremental unit volume. These, coupled with cheaper all-in-ones, will likely go a long way to reviving the PC industry -- although notebooks still appear to be in free-fall.


(Source: AVA Direct)

Foolish bottom line
Intel really does seem to understand that in order to "win" in this space, one must drive pretty significant unit volume. Bringing cheap, quality desktops to the masses, particularly in emerging markets, is a great step toward this. It's also why this Fool hopes that Intel will be very aggressive with Bay Trail-M/D.

The notebook, however, is still unclear, since OEMs seem to be unwilling to use these new low-power chips to build sleeker designs, and are instead just reducing their own costs and increasing margins on their end. 

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple and Intel. 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.

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