Is the Atom saving Intel?

Falling consumer demand for PCs is triggering declining orders for CPUs, Intel admitted yesterday, but not across the board. As it turns out, its smallest consumer processor may be the mightiest of all this year.

While the world's economic troubles have corporations everywhere clamoring for solutions, it's not as though nobody saw the storm coming. The news from Intel yesterday, during its quarterly conference call to financial analysts, indicates that the processor it created not as much for performance but for portability and price may be floating the company's boat: the unsinkable Atom.

As company CFO Stacy J. Smith told analysts yesterday, although revenue from microprocessors overall fell in the last quarter -- certainly not unexpectedly -- if you exclude Atom from the equation, average selling prices ASPs were up. That means that the average price someone pays for a CPU only appears to be flat compared to the previous quarter when you add the low-cost Atom to the mix. That's very good news, for two reasons: 1) Margins can rise, which compensates for the sales slowdown; 2) The Atom sets a new floor for prices across the board, letting component prices for CPUs in the traditional notebook segment to rise. The notebook segment is the real growth segment; and having a netbook processor set the floor for prices prevents price declines in what's currently the market's most valuable sector.

Atom is accomplishing this, according to CEO Paul Otellini remarks, even though a traditional market for Atom processor-based systems (what analysts call a TAM) does not yet formally exist, and even though inventories for Atom-based netbooks have yet to be filled.

"The Q4 impact gets back to my rule of thumb," stated Otellini (our thanks to Seeking Alpha for the transcript). "You've got to view the different segments of the business through the lens of supply line and inventory corrections and Atom was at the other end of that spectrum where there was very little inventory out there, the pipeline was filling, it probably caused it to have a better Q4 relative to some of the other segments, and we're likely to see correction in that that's coming up in the first half of the year."

So Atom doesn't even have to be selling like gangbusters -- it isn't yet, it can't -- to be having a positive effect on Intel, absorbing a lot of the blow. But as the CEO is warning, that's a one-time affair. Now the inventories do have to fill out, and now the new segment has to be treated normally like all the others.

Here is where CFO Smith offers some more good news: "I think the best data we've seen so far, suggests that in excess of 80% of these [Atom sales] are not cannibalizing. They're not taking business from ours or competitive notebooks. Competitive based notebooks, for the most part and as that moves into emerging markets and price points, continue to come down next year, I would expect that trend to continue. So, it really is a bit unbounded because you're dealing with a price point which has not existed before and that's the nature of Atom expansion."

Atom is building a solid market -- not just a niche -- for netbooks at the $400 price point and below. You'd think that if people buy a $400 netbook, that's one less $800 notebook being sold. But as Smith is saying, that's only true now for one buyer in five. People are buying netbooks not as notebook alternatives, but as valuable machines unto themselves.

Say this were a healthy economy instead of a cruddy one. How would Atom play into it, asked one analyst?

Otellini wasn't going there, responding, "That's just like asking Mrs. Lincoln what the play was like. I don't know that you can have that view. I do think that Atom will grow substantially year-on-year into '09. Every pattern we see from our customers, and certainly the exit rate from Q4, says that we will see a significant year-on-year growth."

Next: Atom moves ahead, but in what direction?