Intel (Nasdaq: INTC) confirmed this week that it will shutter its Digital Home Group -- which develops chips for consumer electronics like smart TVs -- and will fold the team into its tablet division. For the time being, the company will continue to sell its existing consumer electronics chips, but you have to wonder why Intel surrendered the category so early.

A question of margins
It's likely that Intel backed out of smart TVs because it didn't see much of a profit margin in the category. About the only connected media player priced above $100 that has had any success is D-Link's Boxee Box. The $299 Intel-powered Logitech (Nasdaq: LOGI) Revue bombed -- despite the awesome power of Kevin Bacon -- and Apple's (Nasdaq: AAPL) set-top box didn't gain much traction until the company released the current $99 version. Meanwhile, Roku's budget-friendly box was a success from the start.

I also wouldn't look to Internet-connected television sets for better margins either. Screen size and resolution do more to set the price than Internet connectivity, which is treated almost as a bonus feature.

Maybe TVs don't need to be smart ... yet
In truth, the lack of demand for smart TV devices isn't that surprising. At the moment, the only reason most of us want to connect our TV to the Internet is so we can watch streaming services like Netflix (Nasdaq: NFLX), which we can do through our video game consoles already. Many apps, of the few that do exist, operate crudely, making the user experience less than compelling. Although I still think we'll eventually expand our online viewing beyond just Netflix and the like to watch most of TV online, it's going to be a slow transition. You can also count on subscription TV providers to fight the move every step of the way.

All of this means that while smart TVs are gaining steam, they will probably remain a niche product for a while.

It's all about tablets these days anyway
Because smart TV devices are unlikely to generate big returns, Intel made the right move in focusing its resources on tablets. Right now, ARM (Nasdaq: ARMH) has the advantage in the world of tablet processors because Intel's chips use too much power.

Given that Windows 8 is currently the most desired tablet operating system and stands to potentially exacerbate the problem of shrinking PC sales when it launches, Intel's best bet is to develop a more tablet-friendly processor.

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