Intel Eyes Tablets As Atom Sales Sputter

Despite delivering strong financial results, Intel's third-quarter earnings call seemed to focus more on what the chip maker wasn't doing -- tablets -- than its existing businesses.

Solution providers and system builders, along with media members and analysts, have been wondering how Intel will respond to the iPad, Apple's tablet home run. In fact, it took less than five minutes before Intel CEO Paul Otellini tackled the elephant in the room: tablet PCs.

"I know that the big question on everyone's mind is how Intel will respond to new computing categories where Intel currently has little presence, specifically tablets," Otellini said. "We think tablets are exciting, and we fully welcome their arrival. Apple has done a wonderful job reinventing the category."

Otellini said Intel was "pleased" with the company's third-quarter financial results, despite the fact that Intel's once-red-hot Atom processor business fell 4 percent sequentially. Another problem for Atom was the fact that average selling prices for the processor and related chipsets were flat.

Ironically, Otellini compared tablets to netbooks in how the two categories introduced a different form factor and new uses for the computing market. But he also acknowledged that the competition from tablets is cutting into both the netbook and traditional PC businesses.

NEXT: The Netbook Cannibalization Debate

"Will they impact PC sales?" Otellini asked of tablets. "Sure. At the margin, they probably will. Consumers will have a limited amount of discretionary income, and some will choose to purchase a tablet instead of upgrading an existing PC or purchasing a netbook in any given period.

"We saw the same thing happen when netbooks were introduced," Otellini added. "But three years later, both the PC and the netbook market segments have grown substantially, and we believe that will happen again with tablets."

The question of how tablet sales are affecting the PC market has been fuel for the netbook ’cannibalization’ debate. Analysts have argued whether or not Apple’s iPad has eaten into netbook and notebook sales, citing various projections, sales figures and market research to support their points. Intel tried to dismiss the issue, but the question lingered.

During the Q&A portion of the earnings call, one analyst pressed Intel on its assertion that tablet competition was only a small contributor to the company's declining Atom-netbook revenue. James Covello of Goldman Sachs questioned why, if consumer technology sales were up overall in the third quarter, netbook and notebook revenue fell in geographic markets where it competed with the iPad.

"I don't think [tablets are] the dominant factor here," Otellini said. "I think the dominant factor is the softness in the consumer market after six very, very strong, sequentially strong quarters and that, to some extent, is to be expected after people buy this much technology, particularly in remaining tough times."

NEXT: A Longer-Term View

Otellini also pointed out that while tablets accounted for maybe 8 million units sold in the third quarter, Intel saw more than 70 million units sold for its PCs. "Remember, we had a record -- all-time record -- for mobile microprocessors in this quarter," he said.

Intel CFO Stacy Smith downplayed the question of tablet cannibalization. "I believe it has much more to do with just economic uncertainty than tablet cannibalization," Smith said. ’As Paul said, the margin there probably is some cannibalization, and over time we will know if it plays out like netbooks and it ends up being additive to the market, in which case it ends up being a very good thing for us.’

Otellini said Intel has a "longer-term view" of the tablet market opportunity and promised to "utilize all the assets at our disposal to win this segment." But it will take more than words to make that win a reality. The opposition isn't just the iPad, which uses the Apple A4 processor that’s partially based on ARM's CPU architecture. Intel must also contend with budding rival Nvidia, which jumped on the tablet market early with its next-generation Tegra processor. Nvidia introduced the Tegra processor at CES 2010, and several manufacturers from HTC to Motorola have pledged to build their tablets based on the chip.

While some tablets like Cisco Cius and Avaya's forthcoming model will use Intel's Atom chip, those business-class tablets aren’t expected to set the world on fire the way the iPad has. As a result, Atom’s path from the netbook to the tablet most likely will be a bit rocky.

However, when asked during the Q&A about Intel's proposed value proposition, Otellini cited Intel's Oak Trail system-on-a-chip, specifically designed for mobile devices such as tablets, as a major advantage. "We have very good silicon with Oak Trail," Otellini said, citing the chip’s power and performance. "The fact that we are the only architecture that runs all but one of the major tablet operating systems -- we don’t yet run on Apple -- says that we’re in a pretty good space."

NEXT: Building Design Momentum

Intel said it's deeply engaged with a number of partners around tablet technology and has strong design momentum, which will lead to the company introducing innovative tablet solutions "in the coming months and quarters" that run on Windows, Android and MeeGo operating systems.

Whenever those solutions are released, Otellini made one thing clear: His company wants a new product category it can grow alongside its existing PC business -- not replace it. "In the end, the tablet category will additive to our bottom line," he said, "and not take away from it."