Intel warning casts cloud over CES

The bellwether chipmaker foresees a 23 percent drop in revenue. It's especially untimely news as it comes on the eve of the premier consumer electronics event.

Intel's fourth-quarter warning is not only bad news but bad timing. With the Consumer Electronics Show kicking off Thursday adorned by all those bright, shiny gadgets, Intel effectively said: gadgets maybe, but not so bright and shiny.

And for an Intel warning, this one was particularly dire. The biggest chip bellwether said it now expects only $8.2 billion in revenue for the quarter, a 23 percent drop from the year-earlier period, and 20 percent from the third quarter. And this comes after issuing a warning on November 12 .

So what's happening? The clearest example of the gloom that has descended on the chip industry, and by extension computer and gadget makers, came relatively early from another chip bellwether, Taiwan Semiconductor Manufacturing Company -- the largest chip contract manufacturer, which supplies chips to all the first-tier electronics and computer makers. Back on October 30, TSMC issued a forecast that set the tone for the rest of the industry: CEO Rick Tsai said the supply chain -- the myriad of companies that order chips from TSMC -- was "reducing inventory very aggressively."

That supply chain, either directly or indirectly, is the computer and gadget makers of the world.

So going into CES, the picture is not pretty. "We just heard consumer electronics sales over the holidays were down 26 percent year to year ," said Broadpoint AmTech analyst Doug Freedman. "You want to head into CES with a pall over it? There it is, right there."

And go the other way, up the supply chain -- the chip gear makers who supply production equipment to chip companies -- and things are even more bleak, with some gear makers saying they don't expect any orders at all in 2009 for certain categories of equipment. In December, Netherlands-based ASML CEO Eric Meurice said that "never before have we witnessed such a sharp and sudden fall-off in lithography system demand."

Other examples are almost too numerous to list: for starters, Toshiba and SanDisk slashing flash memory output 30 percent, Taiwan's memory chip industry on the verge of collapse , and Micron Technology posting a massive $706 million loss .

Yes, there's probably a silver lining in all of this, in that chipmakers and gadget suppliers have to cut the fat and become lean and mean, but where does it end?

And how will this downturn transform the computer industry? Looking at it through the prism of Netbooks -- which are expected to catch much of the limelight at CES -- may provide some insight. These cheap laptop computers are on fire, partially because they are compelling designs but mostly because of price. Good thing? Yeah, great for consumers and small businesses that are finally realizing they don't have to pay $2,000 for a small, lightweight ultraportable notebook. Or simply can't afford a $1,000 notebook.

But not so great for Intel, Apple, and others. "What is the most expensive laptop out there? The Apple (MacBook) Air," said Freedman. "That's a $1,500 or $2,000 machine. Now all of a sudden I'm giving you ultraportability for $500," he said, referring to the price of a Netbook.

In this sense, over-priced notebooks could be seen as roughly equivalent to large SUVs -- overkill. Just as General Motors must wean itself off lumbering SUVs, so may Intel, Hewlett-Packard, Sony, Toshiba, et al., be forced, to some extent, to wean themselves off high-profit notebook computers. After all, what took Sony so long to bring out a Netbook? And why don't we see an Apple Netbook? It's not a stretch to say that those companies don't like the idea of selling a lot of inexpensive computers.

At CES, companies will be hawking flashy gadgets, as always, and maybe attendees can suspend disbelief for a few days blinded by the glare of the gadgets. But that's really just lipstick on a pig.

About the author

Brooke Crothers writes about mobile computer systems, including laptops, tablets, smartphones: how they define the computing experience and the hardware that makes them tick. He has served as an editor at large at CNET News and a contributing reporter to The New York Times' Bits and Technology sections. His interest in things small began when living in Tokyo in a very small apartment for a very long time.

 

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