- Associated Press - Monday, August 30, 2010

SAN FRANCISCO (AP) - As the world’s biggest maker of computer chips, Intel Corp. can’t afford to ignore its huge blind spot in mobile phones.

Eighty percent of today’s personal computers use Intel processors. But Intel is absent in smart phones, which are threatening PCs as gateways to the Internet. One reason is that Intel still doesn’t have good ways to design chips to use less power, so Intel’s products drain batteries more quickly _ something smart-phone makers won’t tolerate.

The dynamic has put Intel at risk of missing out on the next great opportunity for semiconductor companies. That is why Intel has decided to buy the wireless-chip division of Germany’s Infineon Technologies AG for $1.4 billion. With it, Intel gets the chips used in Apple Inc.’s popular iPhone.

The all-cash deal, announced Monday, is an acknowledgment that Intel has missed the boat on mobile phones, and it gives the company an opportunity to correct its course.

The challenge is similar to the one Microsoft Corp. is facing with Google Inc. as software is increasingly being delivered over the Internet instead of being stored on PCs, the way Microsoft has long approached it. Like Microsoft, Intel is the undisputed leader in a market that’s under attack from a fast-rising force from the outside.

Intel is trying to play catch-up before it falls too far behind.

Intel bought mobile software maker Wind River Systems for $884 million last summer, and the company has spearheaded development of the open-source Moblin software, which is designed to run on mobile devices that use Intel chips.

Two weeks ago, it announced plans to buy computer-security software maker McAfee Inc. for $7.68 billion, which would be the biggest acquisition in Intel’s 42-year history once it gains the expected approvals.

As mobile phones become increasingly enticing targets for hackers, security companies have been developing ways to protect those devices. With McAfee, Intel would be able to bake security into its mobile chips _ including those from Infineon.

But even as Infineon’s products give Intel quick entry into the mobile-chip business, Intel is fighting its own history with the Infineon deal, which could prove to be a costly distraction. Many analysts aren’t optimistic about Intel’s chances, pointing to its spotty track record with acquisitions.

“We feel like we have seen this movie before,” analyst Craig Berger with FBR Capital Markets wrote in a research note to investors.

Berger said Intel would gain a strong business with a “sizable presence” among big cell-phone makers and the expertise in building chips based on a low-power design that is widely used in cell phones.

However, he said he is skeptical of Intel’s ability to execute outside of its core market, which is making microprocessors that act as the “brains” of PCs.

Intel needs to branch out because that market is under pressure. Last week, Intel lowered its forecast for the third quarter, blaming weaker-than-expected consumer demand for PCs. PC makers also have been cutting prices drastically in recent years, and in lean times have been buying cheaper chips from Intel just to maintain slim profits.

Intel had a division that made chips for smart phones, but sold it off four years ago in a round of cost-cutting. Since then, Intel has focused on its core business. Meanwhile, use of the Internet on mobile phones has exploded, and companies that make chips for phones have benefited from demand for more capable _ and expensive _ chips.

Story Continues →