If Paul Otellini had announced his retirement six months ago, he could have bragged that Intel's stock had outreturned the U.S. market over one, three and five years. Instead, he announced it on Monday. Sadly for him, the company he has run since 2005 now trails the market during those periods. Intel shares have lost a quarter of their value in three months.
The problem is that Intel's mobile computing problem is getting worse. There are still few signs that it is getting traction in smartphones and tablets. In Intel's core market, PC sales fell 8 per cent in the third quarter. Reviews for Windows 8, the operating system that PC buyers were all (in theory) waiting for, have been mixed, and the man who led the Windows 8 launch has left Microsoft. Apple is reportedly considering replacing Intel in its PCs in favour of chips that use the same Arm Holdings architecture as its mobile devices. And then there is the steady drone of news about Arm chips in server computers – where Intel generates 20 per cent of sales.
Assume, however, that Intel manages to take a share of the mobile market. Why would it not take a nasty hit to margins in the process? In the third quarter, Intel's operating margin was 29 per cent. Qualcomm has a 16-per-cent margin in its chips division and has the advantage of selling integrated processor/radio chips containing Qualcomm's solid-gold intellectual property in the radio. MediaTek, which supplies the processors for lower-end smartphones, especially in China, comes in at roughly the same level. Yes, Arm makes fat margins licensing its intellectual property but its profits are less than a 30th of Intel's. The first job for Intel's new boss is to explain exactly why even those investors who assume that Intel will ultimately win in mobile should not, all the same, pencil in a long-term decline in profits.