Technology

Just What Apple Needs: Intel


The alliance with the world's biggest chipmaker will put Jobs & Co. on an equal footing with PC rivals and will open many more new doors

Is the world ready for Mactel? It better be, because come Jan. 10, that name could very well become synonymous with the historic shift taking place in the PC industry. As the annual Macworld conference gets under way, Apple Computer's (AAPL) Steve Jobs will demonstrate his closer ties to chipmaker Intel (INTC), kicking off what's expected to be a year chock full of glitzy new consumer-electronics gear and computers -- much of it powered by Intel chips.

And just as the Wintel alliance between Microsoft (MSFT) and Intel, forged decades ago by the development of the world's first personal computer, created symbiotic ties between those two companies, the Apple-Intel relationship stands to benefit the new partners immensely.

HOBBLED NO MORE.

For Intel, the rewards are clear. CEO Paul Otellini, in a December interview with BusinessWeek, pointed out that Intel gets a new customer for its chips, ranging from microprocessors for Apple computers to flash memory for the iPod lineup (see BW, 1/09/06, "Inside Intel"). And recent news reports say Apple has also contracted with Intel for Mac motherboard development at the chipmaker's Oregon facilities.

But what does Apple gain from Intel? For starters, it'll finally be on even footing with PC giants such as Dell (DELL) and Hewlett-Packard (HPQ) in terms of chip performance. Apple had been hobbled for years, particularly in the key area of notebook PCs.

Why? Both of its former Power PC chip vendors, Motorola (MOT) and IBM (IBM), had scant interest in making frequent updates to chips delivered to Apple, with its relatively insignificant worldwide market share. Now, Apple will "get flexibility and a partner in Intel that can scale beyond even what they need," notes PC analyst Richard Shim at researcher IDC.

BATTLING OVER VIDEO.

Apple has proved, however, that it brings much more to the table: Innovation that moves whole industries. Indeed, proponents of the switch to Intel chips note that Apple systems debuting this year will be the only hardware capable of running all four popular classes of software -- OS X, Java applications, Linux, and Windows at near-native, or optimal, speeds. That opens the potential for putting just about every consumer application on the planet on an Apple machine.

With most pundits agreeing that the gang in Cupertino, Calif., will make a determined thrust to capture consumers' desire to be entertained from living-room couches, speed and time to market is essential for Apple's success. Indeed, Jobs last year met challenges to its dominance of the digital music market by introducing a slew of products, from the iPod nano to a regular iPod capable of playing video. The result? Its market share hardly skipped a beat, despite dozens of new products lobbed into the market by competitors.

Apple now needs Intel's chip arsenal in what's fast becoming a pitched battle to dominate video, from downloads over the Internet to high-definition DVD players. There, Apple faces formidable competition -- not just from electronics powerhouses such as Sony (SNE) and Samsung but from PC makers newly armed with Intel's Viiv entertainment-PC platform. Intel announced on Jan. 5 that Viiv customers would be able to download everything from old shows like Welcome Back, Kotter, to first-run Hollywood movies this year.

"A DRAFT EFFECT"?

To win, Jobs is counting on Apple's famed design chops and reputation for making complex technologies appear deceptively simple. Analysts and rivals alike reckon he'll succeed to some degree, with many expecting Apple to double its PC market share to about 6% worldwide in the next year.

The real question is whether Apple's entry will help ignite a market where the PC plays a central role in the living room. Rather than lower prices on its Mac products to gain market share over rivals, Apple clearly is hoping it can deliver compelling, stylish products for which consumers are willing to pay a premium. "Right now, everybody is wondering if there will be a draft effect from Apple, or will there be a bloodbath," says Richard Doherty, principal analyst at Envisioneering Group.

Jobs already has experience with such a balancing act. He introduced the $99 iPod Shuffle a year ago, as well as several higher-priced iPods that came with fewer perks such as docks and carrying cases (see BW Online 11/01/05, "I Want My Video iPod"). That helped Apple cut costs and deliver new products, while generally maintaining margins.

BIG BITE COMING.

Even in the PC market, Apple has had similar success. The dramatically lower-priced Mac mini drew raves from reviewers and analysts. Still, Apple generally gave the machines a lower profile in its stores and elsewhere, compared with its higher-margin notebook products and iMac desktops. That helped Apple maintain a higher average selling price even as it won kudos for delivering innovative, low-cost products, IDC's Shim says.

No doubt, Apple faces uncertainty about delivering enough software to take advantage of the new chip architecture. But any potential hiccups are likely to be resolved in short order (see "How Goes the Mactel Software?").

With the playing field leveled for the first time in Apple's history against its PC competitors, expect nothing less than for it to take a huge bite out of the market.

Edwards is a correspondent in BusinessWeek's Silicon Valley bureau.

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