Intel fights for its future with smartphone deals

With Intel finally breaking into the burgeoning smartphone market, analysts say the company is moving to defend its turf - and possibly even its future stability -- against an encroaching competitor.

On Tuesday, Intel CEO Paul Otellini told an audience at the Consumer Electronics Show (CES) here that the company has inked deals to provide its upcoming Atom chips to both Motorola and Lenovo for their smartphones. Intel has been virtually shut out of the lucrative smartphone arena, so this is a big step forward for the chipmaker.

It's also a major defensive move against ARM chips, which have dominated the smartphone chip market. And with more and more users depending on their smartphones for a lot of their computing needs, the PC market -- an Intel strong point -- has suffered as well.

"While Intel sells hundreds of millions of chips a year, there are billions of ARM chips shipped annually and they're being used in increasingly sophisticated devices," said Dan Olds, an analyst with The Gabriel Consulting Group. "If Intel doesn't respond to this threat and get a piece of this pie, they could eventually find their market share being consumed from the bottom up -- much like what Intel did to mainframe and RISC chip vendors."

Intel's news on Tuesday marked the company's first smartphone customers.

Lenovo, which is fairly new to the smartphone space, announced its upcoming K800 at CES; the smartphone was unveiled during Otellini's keynote address. The K800 will be the first smartphone to use Intel's x86 chip. Powered by an Atom Z2460 chip, it's set to be released in the second quarter of this year and will hit the China market first.

As for Motorola, which is a powerhouse in the smartphone arena, Intel inked a deal covering smartphones and tablets that extends for several years. The first Atom-powered Motorola smartphone is scheduled to be released in the second half of this year.

"Intel has been struggling to enter the smartphone market," said Patrick Moorhead, an analyst with Moor Insights & Strategy. "The deals with Lenovo, and especially Motorola, are a very positive step forward and demonstrate Intel's progress in this space. The next steps will be for positive independent phone reviews, plus app developers and carrier support, followed by launch and sell through."

Moorhead also pointed out that ARM has nearly 100% of the smartphone market. That means Intel's deals with Motorola and Lenovo mark Intel's first "credible shot" across its rival's bow.

"I don't get the sense anyone in the ARM ecosystem is up worrying that much, but they are keeping a very close eye on Intel's progress," he added. "From a big picture perspective, Intel has to succeed in this space to ensure a strong future in the client space.... This also bleeds into the server space, where ARM is building credibility."

While Moorhead contends that Intel's move into the smartphone market will make the company less dependent on PC sales, Olds said it's too early to tell if that's true.

"These chips will have much lower selling prices and margins than what they're used to," said Olds. "Volumes will need to be very high in order to pay off for Intel in a big way. We'll have to see how the market responds to these Intel-fueled devices and that's going to take some time to gauge."

Rob Enderle, an analyst with the Enderle Group, argued that Intel's new deals are a good indication that Atom chips will be big players.

"...It is competitive, but when dealing with an entrenched market you don't need to be just competitive, you have to be better enough to get the market to move," he added. "Intel can be competitive. The question is whether they can become better enough so that a market now dedicated to ARM will take a chance with x86."

Intel, according to Enderle, had no choice but to jump in.

"It helps Intel argue they are positioned for the future and not a vendor being obsolesced by new products," he added.

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