Intel Corporation's Tablet Bet Pays Off Huge

By Markets Fool.com

On Intel 's earnings call, CEO Brian Krzanich revealed that the company had met its goal of shipping "north of 40 million" tablet processors -- coming in at a cool 46 million chips shipped. To put this into perspective, Gartner predicts that about 229 million tablets will be sold in all 2014.

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Interestingly enough, simple math tells us that the 46 million number means that Intel captured roughly 20% of the entire tablet market in 2014. That being said, if we exclude iPad sales (since no merchant chip vendor has a chance of selling chips into this market) -- which ABI Research reportedly estimates to clock in at 68 million units in 2014-- then Intel captured about 28.5% of its served addressable market.

That's quite an impressive number, and I believe Intel achieved what it set out to do.

What did Intel set out to do?
According to Intel's earnings release, the company actually saw negative revenue to the tune of $6 million. This highly suggests that the bill of materials offset that Intel is providing on a per-chip basis is actually higher than what Intel is getting for the chips, leading to the negative revenue. The financials are downright ugly, but as Intel's product portfolio gets more competitive, the contra-revenue is expected to go away.

That said, it's important to not lose sight of why Intel chose to do what it did. As has been widely written about, Intel's X86 chips have traditionally been at a software disadvantage to ARM based chips. Most applications work, but programs that have native code (i.e., games) have traditionally been designed only with ARM in mind. Given that Intel was a virtual non-player on Android during 2012 and 2013, can you blame the developers?

With the "north of 40 million tablet" goal, Intel basically set out to change that, and I think this is something that those who only focus on the near-term financials will miss. Intel needed to get its X86 architecture so ubiquitous that developers couldn't afford to ignore it -- which is exactly what's happened.

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This will help in phones, too
Intel still doesn't have a meaningful presence in phones (and I don't think that situation will improve dramatically until 2016), but the work Intel did with Android tablets should pay off when/if Intel has products that can seriously compete for design wins in smartphones. Unlike on iOS, where developers tend to build tablet-specific and phone-specific applications, Android apps tend to be "one size fits all."

In a nutshell, if developers now have to pay attention to X86 because of Intel's sizable tablet presence, that means Android smartphone applications will immediately benefit. This is likely why Intel did not choose to do a similar contra-revenue program to get into smartphones in a large way: With the Android problem "solved," it can wait to enter the smartphone market once its products are competitive.

Evidence that this "worked"
Perhaps the biggest win from all of this is the collaboration between Intel and Unity to finally bring the Unity Engine to X86. Many popular games (according to the Intel press release, over half of game developers use the engine) run on the Unity engine, and Intel's chips tended to run the more intensive of these games poorly. This should be a non-issue going forward -- a statement that, I believe, should apply to X86-on-Android in a more general fashion sooner rather than later.

The article Intel Corporation's Tablet Bet Pays Off Huge originally appeared on Fool.com.

Ashraf Eassa owns shares of ARM Holdings and Intel. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.