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Processing the future... and why

only the paranoid survive...

Intel, the company which probably made the micro-processors that power your personal computer, is having problems. Some people think it’s having small problems - that there’s a minor product timing issue - while others , like Morgan Stanley, think things are much more serious and they’re recommending people sell their Intel shares.  I think Intel is facing some fundamental issues which cast doubts on the company’s 2013 revenue predictions.  Intel’s net revenue for the first quarter of 2013 fell 25%.  So far the share price has held up but my question is: for how long?  The first of Intel’s problems is the general economic recession that is affecting virtually every company in the developed world.  But providing it’s properly managed, the recession shouldn’t pose a major threat to a global company the size of Intel.  Nevertheless, in practical terms, the recession means that people are not replacing or buying personal computers at anywhere near the rate they were.  Intel’s micro-processors are the main component in relatively expensive computers and most people will feel that their existing computer is quite good enough for everyday tasks like browsing the Web. But, as well as the global economic recession, Intel’s problems stem from the fact that they have been caught out by a major disruption that is reshaping the entire computer industry.  You can see from the share price chart on the left of the slide that Intel’s share price peaked dramatically in the heady days of the 2001 tech bubble.  This was when Intel ruled the roost, well before the major industry shift wrought by Apple’s brilliant product design.  Fast forward - and the launch of those two innovative Apple products were directly responsible for Intel’s 25% decline in revenues.  The iPhone launched in 2007 and the iPad was introduced three years later in 2010.  They are both mobile devices but neither product uses microprocessors produced by Intel - they use low battery- consuming ARM micro-processors. According to one insider’s estimate, Intel’s foundries, where its micro-processors are made, are only running at 60% capacity.  Up to now they’ve been operating at 95% volume.  At first sight this drop in capacity might seem to be a bad thing for Intel, however quite the opposite is true.  After the 2001 tech bubble burst Intel was left with a vast stock of unsold micro-processors that had to be sold cheaply, and many were written off at a loss.  Intel learnt from that painful experience and apparently became much more alert and responsive to what was happening in the wider computer industry.  Recently the company has been able to quickly react and cut capacity as the sales of personal computers that use their micro-processors have declined.  That deterioration in sales is set to continue as Gartner originally forecast the market for personal computers shrinking 7.6% in 2013.  The 25% decline in first quarter revenue notwithstanding, Intel is optimistically forecasting that their revenue for the full year of 2013 will be: “unchanged from prior expectations.”  Those expectations are for a “low, single digit percentage increase in revenue.”  These hopes are founded on the anticipated June/July 2013 release of a new generation of faster and smaller micro- processors, that Intel has branded “4th Generation Cores.”  These new micro-processors will power convertible and detachable “ultrabooks” which are a hybrid of a comparatively lightweight laptop which can be transformed into a tablet computer.  You can see Intel’s concept design here.  All this probably sounds hopeful, but Intel’s 2013 revenue forecast is based on two assumptions, neither of which is likely to happen in the way the company is anticipating. Look at the right hand chart: this is based on Gartner’s latest prediction of how many devices of different types are going to ship until 2017.  Normally I’m very wary of forecasts, (particularly weather forecasts), and I view Gartner’s device shipped forecast in much the same way – with a good deal of scepticism.  At best it is an educated presumption, and we all know that even educated predictions can be no more accurate than random guesses.  But allowing for a possible margin of error of at least 30%, what can we see?  In the first quarter of 2013 personal computer sales according to Gartner , actually declined 11.2%.  Let’s assume that personal computer sales will at best stabilise or continue to decline.  Intel is relying on capturing the majority of ultrabook sales.  In one sense they will - because “ultrabook” is Intel’s proprietary name.  As a consequence Gartner has renamed this personal computer category as “ultramobile” instead.  I’ve chosen to use the term “ultrabook” on the chart, because otherwise this makes for a great deal of confusion as “ultramobile” was a Microsoft term first coined as a category for Windows Vista computers. Back to the figures: even making a very optimistic, (but totally unrealistic) assumption of Intel’s “ultrabook” sales for the whole of 2013, they are unlikely to compensate for the 25% revenue shortfall in the first quarter of the year.  Why not? Because the computer market has radically changed.  The appetite for “ultrabooks” will not be as great as Intel presumes:  in April 2012 the company was forecasting that “ultrabook” prices would drop to $699 by the autumn of that year.  They didn’t and, at the time of writing this, they still haven’t.  If you are securely part of the corporate management of Intel you are probably so comfortable that you may not have noticed just how hard times really are.  Roughly half of the personal computer market comes from people buying for domestic use and, because of the precarious economic situation: domestic users are very sensitive to prices.  Besides, nowadays many people are purchasing inexpensive tablets, instead of personal computers, as they can easily access cloud services like Google for documents and email, as well as Netflix for movies.  Not only are tablets considerably lighter and genuinely more mobile, they are much more convenient for many tasks, and the new batteries don’t need charging anywhere near as frequently as those powering a laptop.  As I foresaw back in July 2012, Microsoft’s Surface computer would only be a success if the price was low enough.  It wasn’t, the version using an Intel micro-processor still costs over a $1,000, and that doesn’t include an additional $145 for the keyboard. This brings me on to another of Intel’s problems – Microsoft.  “Ultrabooks” need Microsoft’s Windows operating system to function.  Microsoft is a high profit margin company and their response to Apple’s iPad, and the new era of touch computing, was Windows 8.  Typically, Microsoft has bet the farm on what I call a “Lord of the Rings strategy:” one operating system to rule them all.  Or, perhaps more precisely, one-and-half operating systems if you include Windows RT.  In order to run Windows 8 successfully one needs to have a touch screen as well as a powerful micro- processor.  Intel might well be able to introduce cheaper and faster processors but most of those savings will be offset by the increased prices for touch-enabled screens.  Intel’s 2013 sales revenue forecast is obviously based on their prediction that “ultrabook” prices will start from $599 by this autumn.  But my guess is that these products will not have touch screens if these price expectations are to be met. Microsoft’s Windows 8 has been an upgrade too far for a lot of people, a change to be avoided at all costs because of the inconvenience and time required to relearn working methods.  Microsoft is now trying to make it a tad easier by fixing a host of problems (which should have been sorted out before the launch) with an upgrade to Windows 8.1 by the end of the year.  The chances are that you will need to pay the price of the upgrade to 8.1 if you buy one of the “fourth generation ultrabooks” before then.  Certainly your savvy techie friends are going to strongly advise you not to buy any sort of new laptop before Christmas this year because by December the price of Intel’s fourth generation cores will be more reasonable.  Such word-of-mouth wisdom will be enough to slow the sale of Intel micro-processors without the other factors I’ve mentioned.  It won’t help the situation that in order to maintain its high margins Microsoft, like Apple, is introducing a more lucrative subscription purchase system for the operating system.  This will involve frequent, but continual, comparatively small payments for upgrades instead of a one-off, larger payment for a product release every three years. This presents yet another problem for Intel: only a very small number of mobile phones use Intel’s micro-processors.  The company either didn’t notice or didn’t care that the ubiquitous mobile phone was morphing into a small but powerful pocket computer until it was too late.  This may be because it was only focussed on higher margin, more expensive, products.  At any rate, neither Microsoft nor Intel has responded quickly enough to the hugely disruptive change epitomised by the advent of the iPhone and iPad.  Both companies were so arrogant and determined to maintain their high profit margins: they are now reaping what they sowed.  Microsoft has historically maintained higher overall profit margins than either Apple or Intel and 2013 will be the year when the true cost of maintaining such steep levels of profit margins will begin to show in Microsoft’s performance, and will also affect Intel’s financial results.  More than seven and half times the quantity of mobile phones will be shipped in 2013 than personal computers.  And the great bulk of those mobile phones will contain lower profit margin ARM micro-processors, running without Microsoft software.  Intel now finds itself head to head with ARM microprocessors with lower power requirements, and hence a much longer battery life, which come with a free operating system.  And this free system is just as effective at running a tablet as a mobile phone. Way back in 1996, Andy Grove, then Intel’s CEO, published a book: Only the Paranoid Survive in which he pointed out that there has to be constant vigilance in looking out for sudden changes in a company’s environment.  Grove saw that any alterations in the status quo can suddenly transform a market situation, especially in a high technology industry.  He marked complacency as the great evil to be avoided.  Grove is still an Intel advisor but presumably many of his colleagues have forgotten about his book, written all of 17 years ago.  Whether they, or any of Microsoft’s executives, read and understood Grove’s book, it seems that striving to maintain high profit margins against the odds is just as big a threat to a company as sudden change.  It’s ironic that Steve Jobs “idolised” Andy Grove for his sage advice, yet it was Jobs’ vision which created Apple’s iPhone and iPad, which have ultimately caused the disruptive changes that are besetting Intel and Microsoft. May 2013
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Processing the future...

and why only the

paranoid survive...

Intel, the company which probably made the micro-processors that power your personal computer, is having problems. Some people think it’s having small problems - that there’s a minor product timing issue - while others , like Morgan Stanley, think things are much more serious and they’re recommending people sell their Intel shares.  I think Intel is facing some fundamental issues which cast doubts on the company’s 2013 revenue predictions.  Intel’s net revenue for the first quarter of 2013 fell 25%.  So far the share price has held up but my question is: for how long?  The first of Intel’s problems is the general economic recession that is affecting virtually every company in the developed world.  But providing it’s properly managed, the recession shouldn’t pose a major threat to a global company the size of Intel.  Nevertheless, in practical terms, the recession means that people are not replacing or buying personal computers at anywhere near the rate they were.  Intel’s micro-processors are the main component in relatively expensive computers and most people will feel that their existing computer is quite good enough for everyday tasks like browsing the Web. But, as well as the global economic recession, Intel’s problems stem from the fact that they have been caught out by a major disruption that is reshaping the entire computer industry.  You can see from the share price chart on the left of the slide that Intel’s share price peaked dramatically in the heady days of the 2001 tech bubble.  This was when Intel ruled the roost, well before the major industry shift wrought by Apple’s brilliant product design.  Fast forward - and the launch of those two innovative Apple products were directly responsible for Intel’s 25% decline in revenues.  The iPhone launched in 2007 and the iPad was introduced three years later in 2010.  They are both mobile devices but neither product uses microprocessors produced by Intel - they use low battery-consuming ARM micro-processors. According to one insider’s estimate, Intel’s foundries, where its micro-processors are made, are only running at 60% capacity.  Up to now they’ve been operating at 95% volume.  At first sight this drop in capacity might seem to be a bad thing for Intel, however quite the opposite is true.  After the 2001 tech bubble burst Intel was left with a vast stock of unsold micro-processors that had to be sold cheaply, and many were written off at a loss.  Intel learnt from that painful experience and apparently became much more alert and responsive to what was happening in the wider computer industry.  Recently the company has been able to quickly react and cut capacity as the sales of personal computers that use their micro-processors have declined.  That deterioration in sales is set to continue as Gartner originally forecast the market for personal computers shrinking 7.6% in 2013.  The 25% decline in first quarter revenue notwithstanding, Intel is optimistically forecasting that their revenue for the full year of 2013 will be: “unchanged from prior expectations.”  Those expectations are for a “low, single digit percentage increase in revenue.”  These hopes are founded on the anticipated June/July 2013 release of a new generation of faster and smaller micro- processors, that Intel has branded “4th Generation Cores.”  These new micro-processors will power convertible and detachable “ultrabooks” which are a hybrid of a comparatively lightweight laptop which can be transformed into a tablet computer.  You can see Intel’s concept design here.  All this probably sounds hopeful, but Intel’s 2013 revenue forecast is based on two assumptions, neither of which is likely to happen in the way the company is anticipating. Look at the right hand chart: this is based on Gartner’s latest prediction of how many devices of different types are going to ship until 2017.  Normally I’m very wary of forecasts, (particularly weather forecasts), and I view Gartner’s device shipped forecast in much the same way – with a good deal of scepticism.  At best it is an educated presumption, and we all know that even educated predictions can be no more accurate than random guesses.  But allowing for a possible margin of error of at least 30%, what can we see?  In the first quarter of 2013 personal computer sales according to Gartner , actually declined 11.2%.  Let’s assume that personal computer sales will at best stabilise or continue to decline.  Intel is relying on capturing the majority of ultrabook sales.  In one sense they will - because “ultrabook” is Intel’s proprietary name.  As a consequence Gartner has renamed this personal computer category as “ultramobile” instead.  I’ve chosen to use the term “ultrabook” on the chart, because otherwise this makes for a great deal of confusion as “ultramobile” was a Microsoft term first coined as a category for Windows Vista computers. Back to the figures: even making a very optimistic, (but totally unrealistic) assumption of Intel’s “ultrabook” sales for the whole of 2013, they are unlikely to compensate for the 25% revenue shortfall in the first quarter of the year.  Why not? Because the computer market has radically changed.  The appetite for “ultrabooks” will not be as great as Intel presumes:  in April 2012 the company was forecasting that “ultrabook” prices would drop to $699 by the autumn of that year.  They didn’t and, at the time of writing this, they still haven’t.  If you are securely part of the corporate management of Intel you are probably so comfortable that you may not have noticed just how hard times really are.  Roughly half of the personal computer market comes from people buying for domestic use and, because of the precarious economic situation: domestic users are very sensitive to prices.  Besides, nowadays many people are purchasing inexpensive tablets, instead of personal computers, as they can easily access cloud services like Google for documents and email, as well as Netflix for movies.  Not only are tablets considerably lighter and genuinely more mobile, they are much more convenient for many tasks, and the new batteries don’t need charging anywhere near as frequently as those powering a laptop.  As I foresaw back in July 2012, Microsoft’s Surface computer would only be a success if the price was low enough.  It wasn’t, the version using an Intel micro-processor still costs over a $1,000, and that doesn’t include an additional $145 for the keyboard. This brings me on to another of Intel’s problems – Microsoft.  “Ultrabooks” need Microsoft’s Windows operating system to function.  Microsoft is a high profit margin company and their response to Apple’s iPad, and the new era of touch computing, was Windows 8.  Typically, Microsoft has bet the farm on what I call a “Lord of the Rings strategy:” one operating system to rule them all.  Or, perhaps more precisely, one-and-half operating systems if you include Windows RT.  In order to run Windows 8 successfully one needs to have a touch screen as well as a powerful micro-processor.  Intel might well be able to introduce cheaper and faster processors but most of those savings will be offset by the increased prices for touch-enabled screens.  Intel’s 2013 sales revenue forecast is obviously based on their prediction that “ultrabook” prices will start from $599 by this autumn.  But my guess is that these products will not have touch screens if these price expectations are to be met. Microsoft’s Windows 8 has been an upgrade too far for a lot of people, a change to be avoided at all costs because of the inconvenience and time required to relearn working methods.  Microsoft is now trying to make it a tad easier by fixing a host of problems (which should have been sorted out before the launch) with an upgrade to Windows 8.1 by the end of the year.  The chances are that you will need to pay the price of the upgrade to 8.1 if you buy one of the “fourth generation ultrabooks” before then.  Certainly your savvy techie friends are going to strongly advise you not to buy any sort of new laptop before Christmas this year because by December the price of Intel’s fourth generation cores will be more reasonable.  Such word-of-mouth wisdom will be enough to slow the sale of Intel micro-processors without the other factors I’ve mentioned.  It won’t help the situation that in order to maintain its high margins Microsoft, like Apple, is introducing a more lucrative subscription purchase system for the operating system.  This will involve frequent, but continual, comparatively small payments for upgrades instead of a one-off, larger payment for a product release every three years. This presents yet another problem for Intel: only a very small number of mobile phones use Intel’s micro-processors.  The company either didn’t notice or didn’t care that the ubiquitous mobile phone was morphing into a small but powerful pocket computer until it was too late.  This may be because it was only focussed on higher margin, more expensive, products.  At any rate, neither Microsoft nor Intel has responded quickly enough to the hugely disruptive change epitomised by the advent of the iPhone and iPad.  Both companies were so arrogant and determined to maintain their high profit margins: they are now reaping what they sowed.  Microsoft has historically maintained higher overall profit margins than either Apple or Intel and 2013 will be the year when the true cost of maintaining such steep levels of profit margins will begin to show in Microsoft’s performance, and will also affect Intel’s financial results.  More than seven and half times the quantity of mobile phones will be shipped in 2013 than personal computers.  And the great bulk of those mobile phones will contain lower profit margin ARM micro-processors, running without Microsoft software.  Intel now finds itself head to head with ARM microprocessors with lower power requirements, and hence a much longer battery life, which come with a free operating system.  And this free system is just as effective at running a tablet as a mobile phone. Way back in 1996, Andy Grove, then Intel’s CEO, published a book: Only the Paranoid Survive in which he pointed out that there has to be constant vigilance in looking out for sudden changes in a company’s environment.  Grove saw that any alterations in the status quo can suddenly transform a market situation, especially in a high technology industry.  He marked complacency as the great evil to be avoided.  Grove is still an Intel advisor but presumably many of his colleagues have forgotten about his book, written all of 17 years ago.  Whether they, or any of Microsoft’s executives, read and understood Grove’s book, it seems that striving to maintain high profit margins against the odds is just as big a threat to a company as sudden change.  It’s ironic that Steve Jobs “idolised” Andy Grove for his sage advice, yet it was Jobs’ vision which created Apple’s iPhone and iPad, which have ultimately caused the disruptive changes that are besetting Intel and Microsoft. May 2013
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