Convertibles, 2-in-1's, and laptop replacements were a hot topic in June. It all started with the release of the Surface Pro 3 by Microsoft (NASDAQ: MSFT ) and only got stronger after the recent Computex exhibition in Taiwan. Many OEM's launched their convertibles at Computex 2014, reflecting a strong belief in the future prospects of convertibles and hybrid PCs.
The one company that is going to benefit from convertibles is the technology giant Intel (NASDAQ: INTC ) . It also made some announcements at Computex, with the Core M processor being the most significant one. The company has started leveraging its leading edge process node technologies to ensure its dominance in today's portable computing hardware.
Core M is a new line of processors that sits between the Atom and Core I lines in terms of performance. Core M processors will be based on 14nm FinFET, codenamed Broadwell, and will be used in a wide range of devices including tablets, convertibles, and laptops.
The benefits of Core M are multifold. Performance will be increased by 20%-40%, power requirements will be cut around 45%, and the processors will have a thermal design power, or TDP, of less than 10W. These new processors will be better than Bay Trail at the same TDP. Intel also claims that Broadwell will require 50% less space than its predecessors.
The point is that lower power consumption will enable sleeker, fanless designs. Combine this with high processing power and the processors seem ideal for convertibles and low-end laptops. However, it must be noted that ARM-based 28nm processors have outperformed Intel's 22nm in the tablet arena thanks to integration and low costs. Intel can only gain market share in tablets if it offers contra revenues or comes up with a cost effective integrated design like Qualcomm. Nonetheless, Core M seems to be an ideal match for convertibles, and Intel is positioned to counter the declining growth of PC with the rise of convertibles.
OEM's like ASUS, HP, and Dell demonstrated convertible PCs featuring Intel processors at Computex. ASUS displayed its Core M-based Transformer Book T300, and then there is the Core I-based Surface Pro 3. This indicates that OEMs favor Intel's architecture when it comes to convertibles.
A recent IDC report mentions that tablets will shift toward larger screens, indicating that the Surface Pro 3 will be the beneficiary of this trend. The report goes on to say that Microsoft's share in tablets will double by 2018 and Windows tablets will reach 10.4% as compared to 5.3% in 2013.
As IDC points to the growth of convertibles by mentioning the Surface Pro 3, it is quite clear that Intel Core M-based convertibles will gain traction going forward. This may even lead to a fanless Surface 4 featuring Core M technology.
Tablet design wins
Intel is targeting a 40 million tablet target for 2014. This seemed unachievable before, but now it looks like Intel may be able to reach this target. Dell, Acer, and ASUS recently announced Android tablets utilizing Intel's Bay Trail. ASUS is all-in with Intel as it launched six Bay Trail Android tablets. Toshiba has also launched six Intel based devices including three tablets. An agreement with Rockchip to integrate Intel processors on SoCs means growth for Intel in the Chinese low-end tablet market, which is set to grow by 50%-60% in 2014. Intel claims that it has 130 design wins in all.
On the surface, it seems that tablets are going to add to the bottom line of the company, but more analysis reveals another side of the story. Intel is landing design wins based on contra revenues as it is paying tablet makers for additional component costs thanks to a lack of integrated SoCs. It is also covering the engineering costs of tablet design or porting from ARM to x86. However, the company believes that the bill of material cost is going to be $20 less for its new tablets and will reduce further as its integrated SoC, SoFIA, rolls out.
Essentially, Intel is trying to lure OEMs through contra revenues and is hoping that they will continue to cooperate in the coming years because it will be able to offer integrated SoC solutions by then. It is a strategy that can work, but only if the upcoming integrated SoCs offers price and power savings comparable to those of ARM. As we know, though, 14nm processors entail high costs and extreme ultraviolet lithography (EUV), and 450mm fabs are still not in sight. Intel may not be able to retain its tablet customers unless it offers lower prices for its SoCs.
These factors will in turn affect the company's bottom line. Having leading-edge processors is advantageous to Intel when it comes to notebooks, convertibles, and high-performance computers, but a high cost structure may prevent it from adding to its bottom line through tablets.
The rise of convertibles is going to benefit Intel in the future, and the company will neutralize the slowing PC market growth through its Core M processors which are suitable for convertibles. The company is set to achieve its tablet target, but this will not add to its bottom line due to contra revenues.
Going forward, Intel must lower its manufacturing costs and offer products with lower prices and power requirements in order to add relevant numbers to its mobile bottom line. Intel will continue to dominate a somewhat recovering PC industry thanks to convertibles, but it will face headwinds in the mobile and tablet segments of the market.
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