Intel Acknowledges ARM Threat

Intel posted record revenue for the quarter, but acknowledged that it faces a serious threat from the mobile devices such as tablets and smartphones eating into its market share.

Intel is facing flattening PC and notebook sales. On top of that, at the Consumer Electronics Show in Las Vegas, Microsoft CEO Steve Ballmer showed a prototype for the latest version of Windows, and it wasn't powered by Intel. In its place was the system-on-a-chip architecture from ARM.

While Ballmer did say work would be continued on Intel's chip off the x86 architecture, the message was clear. Intel's unofficial alliance with the Windows operating system -- known as the WinTel ecosystem -- will soon be a thing of the past. The move to ARM chips represents a shift to a more mobile-based OS. And this could spell trouble for Intel.

During a conference call with analysts, Intel CEO Paul Otellini put a positive spin on the situation. The plus for Intel is that, as they unify their operating systems, we now have the ability for the first time, one to have design from scratch, touch enabled operating system for tablets that runs on Intel that we don't have today. Secondly, we have the ability to put our lowest power Intel processors running Windows 8 or next generation Windows into phones, because of the same OS stack and I look at that as an upside opportunity for us, he said.

One, that space has a different set of power performance requirements where Intel is exceptionally good. Secondly, users of those machines expect legacy support in terms of software and peripherals that has to all be enabled from scratch for those devices, Otellini said.

I think the writing has been on the wall for some time, Patrick Wang, semiconductor analyst at Wedbush Securities, said. ARM has been gaining momentum over the past few years. They are not there yet, but they are quickly approaching the tipping point. Intel needs to heed the competition. It won't happen this year, but something could potentially change in 2012 and beyond. Microsoft has broken up the Wintel monopoly and opened up development on ARM. They are keeping their options open.

Wang said Otellini's response was dismissive, and that is a good thing for Intel. If it wasn't dismissive, he'd create panic, Wang said.

Intel is still doing well. The company reported record quarter and year-end revenues and profits. Net income was $11.7 billion, up $7.3 billion or 167 percent year-over-year. For the fourth quarter, the net income of $3.4 billion was up $433 million or 15 percent sequentially. Earnings per share for 2010 were $2.05, up $1.28 or 166 percent year-over-year.

Wang says while Intel does need to prepare itself for the ARM threat, he believes the company's massive research and development capital and manufacturing capabilities will allow it to stay relevant in an ever increasingly competitive field.

The company is increasing R&D by $800 million from 2010 to 2011. Increasing, not their total R&D capital. That's a larger R&D than a lot of countries, Wang said. They also have the best manufacturing. They're saying we may be behind in design, but in terms of getting resources we will make it better. We will add leading edge capacity, apply it to new markets and flex our muscles that way.