Intel’s dilemma and the slowly crumbling PC ecosystem

For an industry whose lot in life is to invent the future and challenge the status quo, technology’s giants are astonishingly stubborn when faced with change. And no two companies personify that more than Microsoft (s MSFT) and Intel (s INTC) — the glimmer twins of the personal computer revolution. For decades the PC buying cycle left these two companies sitting on a mountain of cash higher than even the highest Himalayan peaks. I guess when you are sitting at such heights, it is hard to look down and recognize that the base is being chipped away.

MonopolyTo be sure, I am not saying that Microsoft and Intel are going to go away tomorrow. Their fiscal muscle is enough to put even Popeye to shame. And monopolies (even quasi-monopolies) take forever to fade.

But for the first time they are facing a challenge that is much more profound and broader than they have ever faced in their monopolistic lives: competition and changing tastes. How they deal with these changes is going to write the next chapter of their corporate history.

PC sales horror show

But let’s take a step back. The signs of crumbling came last week when research companies like IDC and Gartner shared data that showed double digit percentage declines in PC sales during the first quarter of 2013. To be sure, the first ninety days of the year are relatively slow for sales of consumer goods, considering that people go on a buying binge during the holiday season, but still a 14 percent year over year decline during the quarter is not something to skim over. It was so bad that even downward trend defying Apple (s AAPL) PC sales are expected to head south.

Many media reports blamed the Windows 8 operating system for this debacle, but this is the fourth quarter in a row we have seen PC sales sagging; we can’t blame the new operating system. The reason why media and analysts continue to make that correlation is because we have in the past made that correlation: new Windows equals big PC sales, almost like clockwork every three or four years. Except now it is not true because our relationship with PC (as we knew it) has changed.

The new personal

It has been just about six years since Apple’s (s aapl) iPhone launched and changed our expectations of computers and our relationship with technology. It became more intimate and personal than either Intel or Microsoft had imagined. It wasn’t as that the companies were unaware of mobile phones, or that iPhone was the first smartphone — Nokia and Palm had been selling them for quite a few years — but the iPhone and later Android phones became truly “personal.”

They made us spend less and less time on our PCs. They were always there, and even when the PC sat on the table, the phone in your hand was more fun and easy to use. And then three years ago came the iPad (and later other tablets) to take away even more of our attention from the PC. And when the iPad launched, I knew my PC was going to become less important. The iPad was my slate of imagination.

In the end, an increasing number of people are finding that they don’t need a whiz-bang PC anymore and they don’t need to upgrade because they can do a lot of things on their iPad or Kindle Fire or Samsung Android tablet.

The signs of this change were obvious to anyone who was paying attention. When Apple dropped “computer” from its name, the late (and then chief executive) Steve Jobs pointed out that it was a sign of the times and where the world was going. Here is what I wrote then:

Apple is making the phone do all things a computer does – surf, email, browse, iChat, music and watch videos. Nary a keyboard or mouse in sight, and everything running on OS-X. While I am not suggesting that this replaces our notebooks or desktops for crucial productivity tasks, the iPhone (if it lives up to its hype) is at least going to decrease our dependence on it.

The future is here

Six years later, the world has really changed for the twin gods of the PC. Unlike Apple and Google, who have hitched their bandwagons to wireless devices, Microsoft and Intel are still weighed down by the legacy of their past. I mean, it is hard for Microsoft to look beyond the profits from Windows and Office. It will always look at the future through the lens of those two products. I have been suspect of Intel’s ability to come out ahead as well.

plex on ipad featuredIntel, too, is so married to the idea of selling more expensive PC chips and silicon for servers that it doesn’t know how to readjust its focus and its fiscal models around a world that wants lower priced chips for a different and always shifting market. Since then the world has embraced the little pocket marvels with amazing speed and that in turn has unleashed a new cellphone economics. The mobile chips are getting faster and faster. And thanks to demand that far strips the demand of classic PC devices, they are getting cheaper.

The mobile phone market is so big that it has attracted all sorts of chip makers into the business: Qualcomm (s QCOM), MediaTek and Nvidia (S NVDA) are some of the players in the mobile chip business that are relentlessly flooding the market with faster, cheaper and more powerful chips. They are being helped by ARM Holdings, (s ARM) which keeps beefing up its chip technology and expanding its possible uses by focusing on not making chips, but instead licensing chip designs to others like Qualcomm.

Intel has to react to these guys; not to Advanced Micro Devices, the perennial also-ran that was always weighed down with an anemic balance sheet and an inability to compete even when it had better chips. And we all know, Qualcomm is no AMD. MediaTek knows how to play the mobile chip game better than anyone else. What does Intel have to show for its mobile efforts?

Change is hard

A lot of noise – press releases, product releases and a handful of devices. Sorry, but I remain resolute in my belief that the company’s DNA is making this transition to anywhere computing very difficult. That inability to change is reflected in the company’s current dilemma over the chief executive position. In an article this week, The New York Times detailed the likely replacements for outgoing CEO Paul Otellini.

Analysts say the two top contenders to be Intel’s next C.E.O. are Brian Krzanich and David Perlmutter, who are close to Intel’s core business. Mr. Krzanich, Intel’s chief operating officer, oversees its fabrication facilities. Mr. Perlmutter, the chief product officer, oversees chip design. Renee James, the head of Intel’s software group, is considered a more remote chance to run what has long been a hardware company. And Stacy Smith, Intel’s chief financial officer, is well liked inside and outside the company, but like Mr. Otellini, lacks an engineering background, which diminishes his prospects.

Regardless of who becomes the new Intel chief, the problem is that they were all weaned on the classic PC business, one that is changing with the rise of smartphones and tablets and lower power anywhere-computing devices.

intelatomThat said (and as my wise colleague Kevin Tofel continues to remind me), Intel is doing relatively well with its Atom lineup of chips and he feels it is one of the reasons why Microsoft RT on ARM devices is facing challenges.

The full Windows 8 tablets that run on Atom processors priced at the same price as RT devices (and with the similar battery life) should give Intel some hope. However, their addiction to the PC-style model and hefty margins that come from being almost monopolistic are going to challenge Intel in the future. As I wrote in the past, companies are defined by their corporate DNA and that determines their outcome.

Microsoft too has similar challenges as it grapples with the idea of competition and a world it doesn’t and can’t control anymore. More on that another day, but in closing, I would like to repeat what I said at the start of this piece: the companies that spearhead the talk of disruption and innovation are the ones who are afraid to disrupt themselves.