According to Barron's Tech Trader Daily, Joseph Moore from Morgan Stanley made the following comment with respect to Intel's (NASDAQ:INTC) recent comments on its earnings call:
Finally, management implied that it may be keeping a ceiling and floor on Bay Trail shipments this year, managing to its 40 million target (somewhat odd for a company trying to work its way into mobile)
As a quick refresher, Intel set a goal of shipping "north of 40 million" tablet processors during 2014 at its Nov. 2013 investor meeting. Further, Intel claimed that because the "bill of materials" that the company's Bay Trail platform (which would make up most of Intel's tablet shipments) required was higher than what competing platforms required, it would be providing its customers with "contra-revenue" to offset that deficiency.
Intel CEO Brian Krzanich stated on the company's fourth quarter 2013 earnings call that this contra-revenue is "on a per unit basis," meaning essentially the more tablet chips that it ships, the more money it loses.
Intel has achieved its strategic goals
I disagree with Moore's characterization of this ceiling/floor as "odd." From what I can tell, the whole purpose of the 40 million goal was to establish Intel as a credible supplier in the tablet chip market. With Intel now, according to Strategy Analytics, the largest merchant vendor of tablet processors and the second largest vendor of tablet processors overall, I'd say Intel has established that credibility.
Additionally, a problem that has been obvious for quite some time is that quite a few applications (particularly games) run fairly poorly on Intel-based processors relative to their ARM (NASDAQ:ARMH) based counterparts. This is because high-performance programs on Android are typically written to run natively on ARM, and Intel-based platforms have to run this ARM-targeted code through what is known as a binary translator which can lead to some pretty serious performance problems.
I have argued in the past that if Intel can garner a large enough presence on Android, software developers will make sure their apps are targeted for both Intel and ARM. As the largest merchant vendor of tablet processors, I would argue that software developers aren't likely to ignore Intel's X86 architecture going forward.
This will also help Intel's push into smartphones
While Intel is the largest merchant vendor of tablet processors, it still doesn't have a meaningful presence in smartphones. However, if Android application vendors are targeting Intel's X86 architecture, then this should also solve the compatibility issues that Intel might have on Android phones.
This is a big deal, as the software compatibility issues were, in my view, the largest fundamental hurdle that Intel had to clear in its battle against ARM.
Foolish bottom line
It seems to be that Intel's "40 million tablet" goal is going to be viewed, in hindsight, as an incredibly smart and gutsy business move. It must not have been easy for Intel's CFO to explain to investors last year that the company would lose even more money in mobile. I remember that as a shareholder I was disappointed that the company's products had the bill-of-materials issues that it did.
However, over the long term, I think that this was the correct strategy. With Intel now a formidable player in tablets (and I suspect that Intel will continue to grow share in tablets), the next step will be tackling smartphones. I'm optimistic that Intel's SoFIA product will be able to gain share in low-end/mid-range smartphones, and I think that the collaboration that Intel just announced with Spreadtrum could go a long way.
I've said it before and I'll say it again: I can't wait for Intel to outline its "new" mobile strategy in greater detail during its Nov. 20 investor meeting.