Intel's Slow Waltz at the Smartphone Dance

In the years during which the smartphone market has taken flight, Intel Corp. (Nasdaq: INTC) has failed to establish a strong position in the smartphone chip business, a fact that can only be viewed as a missed opportunity, coming as it does at a time when PC shipments are on the decline.

Surely Intel, the largest semiconductor manufacturer in the world, should have seen the rise of the smartphone market and prepared for its arrival, but figures show that Intel chips are not inside the majority of smartphones.

IHS Corp. numbers reflect this, and show that among suppliers of mobile handset baseband ICs (analog and digital), Intel holds only 8.4 percent of the market share, and is in third place behind Qualcomm Inc. at 52.3 percent and MediaTek Inc. at 14.9 percent.

I think it's fair for shareholders to raise questions about why Intel was unprepared to meet the high adoption rates of smartphones. I do accept the fact that it's a challenging market, as analyst Linley Gwennap of the Linley Group points out:

It's not every year that the third- and fourth-ranked mobile application-processor vendors bail out of the smartphone and tablet markets, as Texas Instruments and Freescale have done. Or that the fourth-largest cellular-baseband vendor loses its sugar daddy and appears likely to fail—the tenuous spot that ST-Ericsson is now in. Intel, by contrast, earned its first-ever smartphone design wins and appears ready to take up some of the slack, while MediaTek's shipments into smartphones suddenly took off.

As Intel prepares to catch up with its competitors, the company is seizing on the high expectations for the low-end smartphone market, which should offer the chipmaker a golden opportunity. Figures from IHS show that from 2012 to 2016, the market will double with shipments moving from 206 million in 2012 to 559 million in 2016. In fact, according to IHS, shipments of low-end smartphones will rise at a compound annual growth rate (CAGR) of 51 percent from 2011 to 2016. That's faster than high-end smartphone shipments, which will grow at a CAGR of only 12 percent during the same period.

The strong demand for low-end smartphones is mainly from China and other Asia-Pacific countries, as well as Eastern Europe, Africa, and the Middle East. To get its chips into low-end smartphones, Intel introduced, at the recent Consumer Electronics Show in Las Vegas, an Atom processor platform designed to target this market in emerging economies. Francis Sideco, senior principal analyst for wireless communications at IHS, called this a "shrewd strategy" that just might help Intel increase its chip business in this market segment.

In the meantime, Intel declares that it continues to make progress with its acquisition of Infineon Technologies AG Wireless Solutions business and is preparing to launch its first Long-Term Evolution (LTE) solution to support 4G wireless technology -- another important milestone for Intel as it seeks to make inroads into the US smartphone market.

The consensus is that the benefit to be derived from an LTE solution is substantial. According to IHS, three years after its original deployment, projections are that there will be 100 million subscribers to LTE this year.

Intel needs to effectively and efficiently adjust its supply chain to capture this market, but rushing into the market with its product, it seems, is the least of its concerns. With regard to timing, here's what Paul Otellini, Intel's CEO, had to say during a recent earnings conference call about rolling out an LTE for phones:

First LTE phones, I would expect to have launched early next year, principally around MWC-14. We believe we have a very competitive solution. The Infineon team is known for not necessarily being first to market, but being really good at engineering a very solid solution and being cost effective and cost competitive and I think that they are doing a very good job with respect to this product. In terms of integrated solutions, you'll see higher levels of integration from us next year.

Intel has a far way to go to catch up with Qualcomm in the smartphone market. As a company that is heralded as the largest semiconductor company in the world, with a market capitalization of $105 billion, and an aggressive capital expenditure budget of about $13 billion this year, Intel should not be so far behind in the wireless market, but it is.

That said, Intel has a lot to prove during the next 18 to 24 months as it begins to ramp up its processors and its presence in the smartphone market. How Intel rolls out its supply chain strategy during the next 12 months will truly be a test as analysts and investors wait to see its products, price, and smartphone wins. Certainly Intel has not demonstrated that it has what it takes to succeed in this market thus far, but that can change.