Bloomberg News

Intel Software Snag Said to Hamper Windows Apple Response

October 01, 2012

Intel Software Snag Said to Hamper Windows Apple Response

Intel held an event last week showcasing Clover Trail-based tablets from Acer Inc., Asustek Computer Inc. , Dell, Fujitsu Ltd., Hewlett-Packard, Lenovo and Samsung Electronics Co. The new devices, many of which featured detachable keyboards, have weeks of standby time and are capable of playing high-definition video for 10 hours. Photographer: David Paul Morris/Bloomberg

Intel Corp. (INTC:US)’s delayed delivery of software that conserves computer battery life is holding up development of some tablets running the latest version of Microsoft Corp. (MSFT:US)’s Windows operating system, a person with knowledge of the matter said.

Microsoft hasn’t yet approved any tablets featuring an Intel processor code-named Clover Trail because the chipmaker hasn’t produced necessary power-management software, said the person, who asked not to be named since the process is private.

The delay, following remarks by Intel Chief Executive Officer Paul Otellini, who told employees in Taiwan that Windows 8 needs improvement, underscores how the Wintel alliance that has dominated the personal computer industry for three decades is struggling to respond to the threat of Apple Inc. (AAPL:US)’s iPad. At stake is the chance to make up for lackluster PC buying by capturing users who are flocking to mobile devices, snappy applications and elegant design.

“The PC channel is in chaos right now,” said Alex Gauna, an analyst at JMP Securities LLC in San Francisco. “They don’t know what to do. They don’t know what to design for, they don’t know what the consumers are going to buy. Tablets have stolen their growth trajectory, plus the macro situation, plus Wintel has made a mess of their ecosystem.”

PC makers, including Hewlett-Packard Co. (HPQ:US), Dell Inc. (DELL:US) and Lenovo Group Ltd. (992), are counting on the new version of Windows to help them compete in the $63.2 billion tablet market dominated by Apple.

Fighting Apple

Any software development delay gives manufacturers less time to get their tablets ready for the year-end holiday shopping season, undermining attempts to erode Apple’s 70 percent share of tablets.

Tablets featuring Clover Trail are the ones designed by Intel to most closely compete with the iPad. The industry can ill afford a slowdown in getting them into stores with the next iPad due to be released in March or April, said Wes Miller, an analyst at Directions on Microsoft, based in Kirkland, Washington.

“It’s bad news for Microsoft and Intel because it’s not going to present the best light on either one and it will hurt the perception of Windows 8,” Miller said.

While Windows is fundamentally sound, the operating system lacks a wide range of robust applications and PC makers haven’t had enough time to work out kinks with so-called drivers, which connect software to such hardware as printers, according to Directions on Microsoft.

ARM Threat

Microsoft has certified some 800 machines with the new software, said Mark Martin, a spokesman for Redmond, Washington- based Microsoft. That includes tablets running low-power chips with technology from ARM Holdings Plc (ARM) on a version of the software called RT. The recent entrant to the Windows family compounds threats to Intel.

“Microsoft has worked closely with Intel and our hardware partners,” Martin said in a statement. “We look forward to the new Atom-based offerings from Intel to complement the already strong Windows 8 and Windows RT ecosystem.”

Tablets and laptops convertible into tablets built on Clover Trail will be available Oct. 26, said Jon Carvill, a spokesman for Santa Clara, California-based Intel.

“We’re excited about the opportunity for Windows 8 tablets with a broad range of” Intel chips, Carvill said. “We’ve collaborated very closely with Microsoft in extensive testing and validation” for chips, he said.

Intel rose less than one percent to $22.76 at the close in New York. The stock has declined 6.2 percent this year, while the Standard & Poor’s 500 Index has gained 15 percent. Microsoft fell 0.9 percent to $29.49. The stock is up 14 percent this year.

China, Brazil

Intel held an event last week showcasing Clover Trail-based tablets from Acer Inc. (2353), Asustek Computer Inc. (2357), Dell, Fujitsu Ltd. (6702), Hewlett-Packard, Lenovo and Samsung Electronics Co. (005930) The new devices, many of which featured detachable keyboards, have weeks of standby time and are capable of playing high-definition video for 10 hours.

Still, any delays caused by unfinished software or untested hardware in tablets, laptops and desktops would be harmful to an industry already seeing demand faltering in China and Brazil, countries that until recently could be counted on to compensate for weakness in the U.S. and Europe.

The refresh of the software that runs more than 90 percent of all personal computers typically leads PC makers to stock up on parts in anticipation of a surge in orders. Microprocessor shipments have risen an average 6.7 percent in the quarter before new Windows PCs go on sale, according to Mercury Research, while PC sales gained by more than 15 percent in each of the past two release quarters, researcher IDC said.

Sales Decline

This time around, Intel is on pace for a sequential decline (INTC:US) in third-quarter sales for the first time in two decades. Western Digital Corp. (WDC:US) trimmed its forecast for disk drives, and analysts at IDC said the PC market will expand less than 1 percent this year -- the worst performance since it shrank in 2001.

“It’s a tough environment right now,” said Dean McCarron, an analyst at Cave Creek, Arizona-based Mercury Research, who has been tracking PC-industry data for two decades.

According to McCarron, computer-processor industry sales have posted as steep a decline only twice before in 20 years: in 2000, amid the bursting of the dot-com bubble, and in the fourth quarter of 2008, after the financial meltdown. He estimates that 8 million fewer PC processors will ship last quarter than the previous period, which means fewer PCs built.

Chip orders are an important indicator of how confident manufacturers are of what will happen when the new PC models go on sale.

Touch Screen

While consumers no longer stand in line outside stores to get the latest version of Microsoft’s operating system, as they did when Windows 95 went on sale in August of that year, even versions like Vista -- which was panned by reviewers -- can help the industry. PC sales jumped 15.3 percent from a year earlier in the quarter Windows Vista debuted. Its replacement, Windows 7, prompted a 15.2 percent increase, according to IDC.

In answer to the surging popularity of handheld devices led by the iPad, Microsoft has given Windows 8 a touch-screen interface. It has also opened up Windows to chip technology other than Intel’s, and is plotting a move into the hardware market itself with a line of tablets, dubbed Surface.

All that may be cold comfort for Intel and other traditional PC component makers, because in many cases tablets rely on parts better made by competing suppliers.

Meanwhile, tablet shipments have more than tripled in 2011 and will jump 67 percent this year, according to an estimate by JPMorgan Chase & Co.

Lateness Hurts

“It’s obvious that tablets are taking sales from notebooks,” said Chris Danely, an analyst at JPMorgan in San Francisco. “We’re all buying tablets.”

With a growing list of Windows 8-based designs to choose from -- notebooks, tablets, laptops with touch screens, touch- screen desktops, laptops with detachable screens that become tablets -- PC makers have avoided snapping up their usual stockpiles of parts until demand is more clear, according to CJ Muse, an analyst at Barclays Plc.

“Folks are sitting on their hands in terms of what they’re building and they’re planning on air-shipping whatever starts to sell,” said Muse. “There’s just too much uncertainty.”

Still, the main obstacle isn’t lack of enthusiasm about Windows 8. The underlying challenge is that Microsoft and Intel were too late with products aimed at fending off tablets, said Doug Freedman, an analyst at RBC Capital Markets.

Intel began pushing Ultrabooks, slim-line laptops that start up instantly, last year. The devices haven’t come down in price fast enough to woo buyers, and Windows 8’s planned arrival Oct. 26 has given Apple and other tablet makers too much of a head start.

“They’re six to nine months late,” Freedman said. “They haven’t put their best foot forward against the tablet.”

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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