Dell, and Netflix: The Meaning

Intel has embarked on what might be the biggest battle of its corporate life, the battle to become relevant in the embedded system and appliance space.  While Intel has a license to produce ARM chips, it realizes that exercising it isn’t the answer to getting into the smartphone/tablet space.  Not only would it suffer in terms of profits after the license fees, it would be perpetuating someone else’s processor architecture in the hottest space in the market.  But wanting relevance isn’t getting it.

The big barrier for Intel to cross is getting big-name appliance OSs, which I’ve been calling “Embedded Control OSs” or ECOSs, ported to their architecture.  One reason why Intel got so into the MeeGo Linux model was that they could easily support the porting of that OS to their architecture.  They can do the same with Android (and in fact are doing just that) but it’s harder to get iOS moved over; Apple is in sole control there.  However, even getting the OS ported isn’t going to solve the problem because there are hundreds of smartphone and tablet models out there already, and more arriving every day.  Given that Intel won’t be ready with even a minimal offering until 2012 and won’t be competitive in performance until likely 2013 or even 2014, things could get tough for them.

The reason Intel cares is shown by another thread of discussion in its recent conference.  The company was very defensive about the future of the PC, saying it wasn’t going to become an irrelevant dinosaur in a world of tablet mammals.  Intel made the PC market, and still commands it (AMD’s efforts notwithstanding).  If that market takes a hit because consumers start buying tablets (which HP’s results say is already happening, but clearly there haven’t been enough tablets shipped to have had the effect), then the loss to Intel in PC chips has to be made up.  That means not just matching the volume of CPUs lost, either, because appliance CPUs have much lower prices and profits.  They have to command the appliance space.

The only thing Intel has going for it there is the fact that both the key appliances—smartphones and tablets—are going to enter a kind of “window of susceptibility” in late 2012.  In the smartphone space, the combination of 4G rollout and normal product cycles will put a large number of users in the market for a new phone.  In the tablet space, the Apple iPad onrush will have generated effective Android response, which means that mass-market rollout of tablets will be starting.  If Intel can be ready for that two-barreled market shift, they can be a player.  The question is how to do that.

What they need to avoid at all costs is linking up with Microsoft and Phone 7 on this point, something that we hear is being promoted by Microsoft/Nokia to Intel even now.  As tempting as re-launching the “Wintel” alliance might seem, Phone 7 isn’t the star Intel wants to hitch their wagon to.  Similarly, they need to abandon MeeGo in favor of Android simply because they can’t promote another OS at this stage; there are already too many out there and developers won’t latch on.

In a related matter, Dell reported its numbers and showed a sharp gain in profit contrasting to HP’s dismal numbers and outlook.  The difference, of course, is that Dell has much lower consumer exposure than HP and a narrower product line with less management cycles spent trying to organize all the profit pieces.  There are a number of interesting lessons to be learned here.  While the cloud is shifting compute focus back to a central data center model, it’s not driving the PC out of businesses.  Also, professional services aren’t the cure-all that many hoped they would be; a product company has to be a product company, or get out of that business and become Accenture.

Moving on to another topic, Netflix has been named the number one source of downstream traffic in the US, accounting for just under a third of all bandwidth consumed.  Obviously that means that video is the overwhelming majority of downstream traffic since there are many other sources than Netflix.  This only further highlights the problem that operators face.  Not only are they being asked to capitalize increased traffic that their current all-you-can-eat pricing model doesn’t monetize, they’re subsidizing the cannibalization of their own TV revenue opportunity.  That’s particularly true for the cable MSOs whose primary revenue stream has always been TV.  The markets are getting close to breaking here.



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