Apple didn't take kindly to disparaging remarks made publicly last fall by a pair of Intel (INTC) executives about the iPhone and its chips, designed by ARM Holdings. The computer maker was so incensed, in fact, that Chief Executive Steve Jobs called Intel's Chief Executive Paul Otellini to complain, people familiar with the matter say.
The jabs stopped and Intel publicly backed off its comments. But the episode is a reminder of Intel's larger ambitions for handheld computers and mobile phones, and how those plans could put it at loggerheads with some longtime partners. Intel, the world's largest chipmaker, is readying new chips and a version of the open-source Linux operating system specially designed to run a new class of "mobile Internet devices," or MIDs. Consumers could use the devices to play high-definition video, make Internet-powered phone calls, or download directions and local business listings on the go. The effort could presage an attempt by Intel to land its products in pocket-size smartphones, a category where Apple (AAPL) has sold 17.4 million units.
At the same time, as Intel tries to tap into the burgeoning market for smartphone and handheld chips, estimated by iSuppli to be worth $3 billion this year, its mobile Internet devices could also compete with the iPhone for buyers. Intel's Linux effort also poses a threat to longtime collaborator Microsoft (MSFT), which is trying to land its Windows Mobile operating system in more handheld devices. Intel is stocking up on Linux talent, partly to aid the handheld effort. "Intel is going to be entering solidly into Apple's space," says Rob Enderle, president and principal analyst at the Enderle Group. "It's going to make for an interesting next decade." Apple declined to comment.
Partnering with Device Makers
The Linux software, called Moblin 2 and expected to be in software developers' hands by March, will run new portable computers Intel calls "MIDs," set to arrive around midyear, Intel told BusinessWeek. Companies including Lenovo (LNVGY), Hitachi, and BenQ already make MIDs using previous designs, and Intel plans to announce new partners in February at a mobile technology conference in Barcelona, Spain.
By providing a free version of Linux for mobile devices that run its chips, Intel is hoping to jump-start a new breed of handheld computers, a category it's been largely shut out of. Most smartphones—including the iPhone and Palm's (PALM) new Pre, which garnered accolades at its Jan. 8 unveiling in Las Vegas—run chips designed by ARM and licensed by manufacturers including Qualcomm (QCOM), Samsung, and Texas Instruments (TXN). On Jan. 19, Qualcomm paid $65 million to Advanced Micro Devices (AMD) for technology and engineers to enhance its smartphone chips' multimedia capabilities. "Intel would like to promote the MID category at the expense of high-end smartphones," says Gordon Haff, an analyst at market researcher Illuminata.
The fight over which companies will supply the chips and software for smaller and more powerful handheld computers such as MIDs comes as the PC recedes from the center of tech industry action. Worldwide PC sales are expected to drop more than 5% this year. Waning demand has slashed Intel's fourth-quarter profit by 90%, and whacked Microsoft's second-quarter earnings as well.
Mobile Computing's Category Lines Blur
Meantime, handhelds are taking on many of the functions of full-fledged computers. Market researcher Gartner (IT) forecasts the worldwide smartphone market will grow 32% in 2009, to 190.8 million units. "The line between what's a smartphone, what's a mobile Internet device, what's an ultra mobile PC—it's all going to disappear," Dell (DELL) CEO Michael Dell said in an interview last year. Another sign of the changing times: Intel Chairman Craig Barrett, who presided as CEO over the PC boom of the late '90s, said on Jan. 23 he plans to retire in May.
Yet Intel's history in the mobile computing market has been checkered. The company sold its XScale mobile chip business to Marvell Technology (MRVL) in 2006, and some analysts are skeptical its latest run at handhelds will go better. "What Intel is trying to do with this mobile Internet device category is essentially tell people, 'The smartphone is too limited for a lot of applications…so you need this thing in between,'" says analyst Haff. "I've certainly yet to be convinced there's a market for something in between a smartphone and a netbook."
To help with the convincing, Intel is stocking up on staff skilled in the operating system that will run the devices. One of the world's most experienced Linux programmers, Alan Cox, will join Intel from Red Hat (RHT) in March and work on projects including Moblin. "They were more than happy to have him there," says Paul Cormier, an executive vice-president at Red Hat. At the beginning of January, Intel brought on board Peter Anvin, another key Linux developer.
Intel is also paying special attention to MIDs' software to try to ensure users find the devices compelling. The devices will feature new capabilities like touchscreens that recognize users' gestures and a graphical user interface that employs 3D and translucent icons. Moblin 2 will be free to hardware makers and distributed by companies including Canonical and Novell (NOVL). "What we've done in the PC space, we're driving into these smaller[-size] devices," says Doug Fisher, vice-president for Intel's software and services group. "We're doing some aggressive stuff to make sure Linux takes advantage" of MIDs, he says.
Modifying the Atom Netbook Processor
On the hardware side, Intel is adapting its Atom processor, used today mainly in low-priced portable netbook computers, for MIDs. Atom sales have been a bright spot in Intel's otherwise gloomy business; fourth-quarter sales of the chips rose 50% from the previous quarter, to $300 million. A lower-power version of Atom called Moorestown, scheduled to arrive in 2009 or 2010, will target MIDs, which need to run longer and cooler than netbooks do, and future Atom chips could target smartphones as well.
Developing free software for mobile Internet devices also gives Intel an alternative to Microsoft's Windows Mobile operating system, whose market share has been shrinking. Microsoft counters by saying it doubts the market potential for handhelds with relatively large screens that could be unwieldy to carry around. "I'm not sure there's a third category of device" between a cell phone and a netbook, says Andy Lees, a senior vice-president in Microsoft's mobile communications business. "The thing that distinguishes a phone is it goes in your pocket or purse. If you have a six-inch screen, that's no-man's land."
The fight over who'll supply the chips and software for new generations of mobile computers is straining some of the tech industry's most durable alliances. "Intel is very aggressive about developing a software platform that they can deliver on MIDs, and eventually cell phones, and deliver it with their [chips] for free," says analyst Enderle. "Apple and Microsoft are…collateral damage."
Ricadela is a writer for BusinessWeek in Silicon Valley.