Another Chip War May Be Heating Up (INTC, AMD, NVDA, QCOM, ARMH, BRCM)

Next week’s Consumer Electronics Show in Las Vegas could well see the beginning of the next round of technology development. Chip giants Intel Corp. (NASDAQ: INTC) and Advanced Micro Devices Inc. (NYSE: AMD) are expected to announce new microprocessors that include on-chip graphics processing units, or GPUs, that could spell real trouble for GPU makers like Nvidia Corp. (NASDAQ: NVDA).

 
By integrating GPU functions on a microprocessor, Intel and AMD will increase computational speed, reduce the number of components that PC makers will need to integrate, cut the makers’ production costs, and make PCs and laptops smaller and more energy efficient.

 
Eliminating the need for a separate graphics co-processor poses a threat to Nvidia’s GPU business for an integrated graphics card in PCs and laptops that are used as general purpose computers. But high-end graphics applications, like video editing and games, are not likely to be affected much because those applications still require more graphics horsepower than either Intel or AMD can stuff into their CPUs.

 
And while this is an interesting skirmish, the real battle remains between PCs and laptops on one hand, and mobile devices like smartphones and tablets on the other. The Intel and AMD chips are not designed for mobile devices, and that’s where the buyers are headed.

 
The dominant makers of CPUs for mobile devices are Qualcomm Corp. (NASDAQ: QCOM) and ARM Holdings plc (NASDAQ: ARMH), and they are not sitting still. Nor is Broadcom Corp. (NASDAQ: BRCM), which recently announced a baseband chipset for smartphones that offers a dual-core ARM processor, support for Bluetooth, GPS, a five-megapixel camera, and higher definition graphics.

 
The Broadcom chipset is not exactly the big news. The big news is the price. A smartphone based on the Broadcom chipset could retail for less than $100, and that could happen by the middle of 2011. These phones would use the Android operating system from Google Inc. and would be targeted at the low end of the market. A device built on the Broadcom chipset and Android could offer the capability of a $530 Nexus S for less than $100 by this time next year according to an article in Fortune online.

 
Nvidia, too, has a potent competitor in the mobile device area based on the dual-core ARM processor. The company has received substantial orders from Samsung, HTC, and others for its Tegra 2 processor that is expected to power new tablet devices.

 
To top all this off, Goldman Sachs has predicted that tablets will cannibalize as much as 35% of PC sales. That’s an aggressive forecast, but even a more conservative forecast from Gartner has tablets eating up 10% of PC sales by 2014.

 
Facing slower growth in the PC and laptop markets means that Intel and AMD are forced to find ways to cut costs to computer makers so that these customers can compete with mobile devices that are increasingly powerful and getting cheaper, it seems, by the day. But even falling prices for PCs and laptops won’t prevent severe erosion of those markets by mobile phones and tablets.

 
Paul Ausick