Two years ago, Intel (INTC) held a contest for college students, asking them to come up with new uses for the company's Atom processor. One proposal: a shower that regulates water temperature and plays music from the Internet. While Intel doesn't plan to enter the shower market, it is putting its chips into gas pumps, cars, musical instruments, and other devices where few processors have gone before.
Chips that act as the brains of electronic devices other than computers or mobile phones are known as embedded processors and represent a $10 billion market, according to Intel Chief Executive Paul Otellini. That's small compared with the $34.5 billion market for PC processors. Intel will have $43 billion in revenues this year, according to analysts in a Bloomberg survey. Of that, only about $1 billion comes from embedded products, says the company. Still, Atom sales are growing fast, and the company is counting on the chip to help break its dependence on the slowing PC market. "There's a limit to where their core business will take them," says Alex Vallecillo, a fund manager at PNC Capital Advisors.
Although Atom chips aren't as powerful as the ones that run PCs, they're much cheaper, which makes them economical for powering all kinds of devices. Nautilus puts Atom chips into its treadmills to stream Internet video onto built-in displays and upload the times and distances from workouts, Intel Vice-President Doug Davis says. Digital advertising signage is another growth market for Intel, says Alex Gauna, an analyst at JMP Securities in San Francisco. LG Electronics is using Atom chips in signs that will recognize the age, gender, and other characteristics of passersby and change the advertising pitch accordingly—similar to electronic billboards in the 2002 Steven Spielberg science fiction film Minority Report. Since Atoms also use little power and don't require bulky batteries to run, they're popping up in unexpected parts of the world. In India, banks are using them in handheld terminals that serve rural areas off the electricity grid. Once a month or so, an itinerant teller visits a village, giving locals access to loans and other banking services.
ARM Holdings (ARMH) sells designs for similarly energy-efficient chips that are licensed by customers including Texas Instruments (TXN), Qualcomm (QCOM), and Marvell (MRVL). Those companies already have a hold on the mobile-phone market—one area Intel has failed to penetrate—and are trying to expand that dominance into the embedded market. For now there's enough room for both Intel and ARM technology, according to JMP's Gauna. "It's a rising tide," he says.
In the second quarter, Intel received 3,800 inquiries from customers that wanted to design Atom into their products, says Davis. Some 1,200 of those proposals are on their way to becoming Atom-based products. While Intel isn't designing a different chip for each customer, it is offering so-called systems-on-a-chip, semiconductors with the functionality of multiple chips built into one. That makes it easier for electronics manufacturers to get their products to market quickly.
Intel also designs software that makes it simpler for customers to make products that use Atom processors. Last year, the company paid $884 million to acquire Wind River Systems, which designs operating systems for cars, mobile phones, and industrial machinery. Wind River tailors commonly used operating systems such as Linux and Google's (GOOG) Android to work on Intel's chips. Operating systems are the basic set of programs that control any device with a chip. If Wind River didn't customize that software, the manufacturers would have to do so themselves at considerable effort and expense.
In its largest acquisition ever, Intel in mid-August purchased security software maker McAfee (MFE) for $7.68 billion. The company's rationale: With all these Atom-powered gizmos connected to the Internet, they're going to come under the same kind of virus and malware attacks that plague PCs. That will require protection, which works better if the software is built into the chips.
The bottom line: Embedded processors are a fast-growing business for Intel that may help it reduce dependence on the maturing PC market.