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Intel (INTC) has been the industry leader for the chips at the heart of personal computers for years, with a dominant 80% market share. Personal computers had been the gateway to the Internet since the web was introduced in the early 1990s. However, it appears that other technological gadgets, most notably cellular handsets, have become a threat to Intel’s position at the “gate” of the Internet.
Cellphones have not only become increasingly popular over the past 15 years or so, but they have become cheaper and much more powerful. These devices, which were once used as a means of voice communication only, now offer video, music, texting, and Internet service. By 2013, the number of cellphones being used for Internet access is expected to reach one billion, a fivefold increase from 2006. Other portable devices pose a threat to Intel’s Internet access dominance as well, as most of these products do not contain Intel chips.

There are a few large players in the mobile communications market:

Qualcomm (QCOM), the largest producer of cellphone transistors, has an agreement with Google (GOOG), to supply silicon for its Nexus One cellphone. That device will run on Qualcomm’s Snapdragon chip. Qualcomm predicts that the chip will be used in 40 devices made by 17 manufacturers over the next several years. Boosting the company’s presence in the chip market is its use of ARM technology. ARM (created by ARM Holdings) is a technology used in chips that power cellphones and smartbooks. We look for ARM-based notebooks to grow rapidly in the years ahead, due to their high performance and low power consumption. Qualcomm also has lucrative agreements with Hewlett -Packard (HPQ) and Lenovo.

Texas Instruments (TXN), the second-leading silicon producer for cellphones, sold part of its wireless business last year to cut costs. The move was in response to the global economic slowdown. The company continues to invest in its analog, embedded processing, and OMAP (Open Multimedia Application Platform) applications processors. These high-performance chips are the heart of many smartphones.

Last October, Marvell (MRVL) released a new line of chips called Armada. These chips can run fast enough to bring personal-computer level computing to e-readers (a device that reads digital books) and tablets. Internet devices had previously failed to catch on with consumers because of performance issues and poor battery performance. The new line of transistors by Marvell, along with many of its competitors, attempts to alleviate such concerns.

Apple (AAPL) recently introduced a tablet computer called the iPad. The device is a 9.7-inch multi-touch computer that starts at $499 for the 16-gigabyte model. We believe that this product will be highly successful given that it runs most of the 140,000  iPhone applications, thus giving it a significant head start. A touch-screen smartphone can be thought of as a small tablet PC. Smartphones offer the right mix of processing, speed, low power consumption, and touch screens, which makes them easy to use as an Internet device. The Apple iPhone currently uses Samsung chips in its phone; the silicon in the iPad was largely internally developed.

That brings us back to Intel.  In the past, the chip behemoth has had a difficult time cracking the mobile communications market. In fact, in 2006 the company eliminated its Mobile Chip unit, after investing $5 billion, claiming that it was too late to the dance and failed to garner enough customers.  However, management has made the decision to re-enter the market. In early January, the company introduced its next-generation Atom processor, which will be used in notebook designs from companies including Asus, Acer, and Dell (DELL). They will also be used in other devices that access the web and e-mail. Thus far, Intel appears to have had more success with the mobile phone computer hybrid chip that it has brought to the market.

We believe that Intel might well establish a presence in the mobile phone market in the long-term. Intel has deep pockets and we believe that its immense size and large cash hoard will likely help it to achieve this objective. We think that this can be accomplished through increased spending coupled with strategic acquisitions. Last year, in fact, the company signed a promising agreement with mobile industry leader Nokia (NOK).  Moreover, Intel’s ability to hold off Advanced Micro Devices (AMD) in the personal computer industry is a testament to former’s fortitude. However, Intel has failed to make the grade in the wireless market in the past, and therefore, there is always the possibility that history may repeat itself.