Apple’s MAC Air at the Eye of the Storm

Will they or won’t they convert the MAC Air to the A6 processor this year? That is the question that intrigues many analysts and prognosticators who want to see if a competitive ARM ecosystem can lay low the mighty Intel. Apple’s conversion to an A6 based MAC Air would signal that the MAC OS operating system has been successfully ported with full functionality and compatibility on a processor that would cost significantly less (over $100 less) than Intel’s Sandy Bridge ULV. This decision, however, is likely to be based more on a longer-term view of whether Apple believes it has the “Corporate World” locked up for PCs.

Apple originally introduced the MAC Air in January 2008 as the world’s lightest 13” notebook but with a HDD. In late 2010, they added an 11” screen and converted over completely to SSD drives. Thus the “Market Gold Plated Standard” with which Intel based its Ultra Book initiative was formed. In mid 2011, Apple adopted the Sandy Bridge ULV CPU while dropping the nVidia graphics controller and volume took off in the second half of last year. As usual Intel saw a trend many months after it was formed and decided to redirect its factory focus on the one area that could slow down Apple while pulling revenue away from nVidia and AMD. As mentioned in this blog last year, when one considers the usage profile of a tablet user one also sees the same performance and battery life requirements of an ultrabook. Therefore the electronics will end up being similar. As the cloud ramps up, the number of offerings will explode around these sub 3lb form factors that are guaranteed to feature a variety of screen sizes and resolutions, communications (wifi, 3G, 4G), and processor with integrated graphics performance options.

In Tim Cook’s presentation to Goldman Sachs last week, he was asked about the future of the iPAD with respect to the PC. He commented that he thought that the iPAD volume would exceed the PC in the next few years, although the PC would still be relevant. He also hinted at an expanded iPAD product line, which I read to mean they are going to effectively overlap the MAC Air in capability (sans Microsoft Office). For a marketing guy promoting the iPAD and MAC Air it is the very best of times because sales are booming and there is a clear-cut line drawn through the products that permits distinct branding. The MAC Air supports OS X while the iPAD supports iOS. Apple’s margins are much higher on the iPAD than the MAC Air. No sales guy has to explain to a customer that the new MAC Air is a “less than” version vis-à-vis the old model for any reason. So, until the MAC Air receives any credible threat, it should be assumed that in military terms, the MAC Air is holding the front line while the iPAD moves forward in a Pincer movement to envelope the <$999 mobile PC industry.

In addition to the distinct brands, there is an advantage in the short term for Apple to attack the “Corporate World” with both the Apple CPU based iPAD and an x86 based MAC Air and MAC Book Pro and it involves Intel’s corporate sales force. There are hundreds of Intel sales people who meet regularly with large corporate IT folks promoting the performance and ROI benefits of PCs based on their processors over those built with AMD processors. Right now Dell and HP with their Windows based PCs control a large part of the PC purchases and are hoping Windows 8 extends that lead with tablets. These next two years will be critical for Apple to overthrow the entrenched players and put Microsoft back on its heals. Intel would like all three to be successful, but knows that it may not be possible. If Apple is successful, then they gain an upper hand in negotiating lower processor prices with Intel or optioning to move the MAC Air over to ARM based CPUs. In the mean time they will introduce a slimmed down MAC Book Pro to take up a slot just slightly larger than the MAC Book Air. If needed the MAC Air could vanish between the iPAD and Mac Book Pro.

Intel knows that the risk to their business lies in looking at the market from just a processor perspective and is marching forward with what it believes will ultimately trump the accelerating growth of Apple as they cannibalize the PC market. Intel, in the 1990s was able to maximize ASPs and revenue by promoting an even playing field between Dell, Compaq, IBM and the rest of the PC makers. This dynamic evaporates in the heat of Apple’s 25% PC growth rate in a market where the rest of the growth low single digit. When iPAD shipments are factored in, the dominance can be seen to be staggering. In short, the processor is no longer king. Instead, it is the whole platform residing on one die or at the very least in one package that will determine the winner. In essence the small package attributes of the Smartphone meet in the middle with the performance attributes of the Notebook PC. Intel appears to be betting that by 2013 it will get the processor + graphics + communications in one die based on a process technology that is 3-4 years ahead of TSMC and Samsung. At this point they will have all the bases covered: higher performance, lower power and lower cost. It will be overwhelming attractive for Apple to move into Intel’s foundry orbit. The question is – at what price?

Intel today averages a gross margin of 64% across PCs, mobiles and servers and would happily take Apple’s A6 processor into its fab at a gross margin north of 60%, perhaps even 50% given how strong server margins are. Intel’s massive $11B capex in 2011 and planned $12.5B in 2012 is a strong signal that it believes that its 3-4 year process technology lead will mean that the mobile platform is moving its way, whether it is Apple’s or those based on its own x86. With the 22nm fab build out, Intel can ramp revenues from $54B last year to as much as $70B later this year and the 14nm fab built out underway will increase their revenue footprint potential to over $90B in 2014. This is why I see Apple coming into the picture in the 2H 2012.

Apple’s leaking of an A6 powered MAC Air, is typical of a company that is in the middle of negotiations between Samsung, TSMC and Intel over how to divide its processor business. Initially, I don’t foresee a complete cut over of Apple’s Foundry business to Intel. Samsung and TSMC are positioned to sell the lagging technology for older generation A5 and A6 processors at low prices while Intel delivers the leading edge process for newer A6 and future processors or perhaps a customized ARM and x86 platform. Meanwhile Intel will continue to pull in IP that plugs into the mobile platform in advanced processes in a lower power, lower cost way than what can be found from other vendors.

As Apple continues to scale, to date matched only by Samsung in smartphones, the economics of Mobile Tsunami will winnow out many competitors and suppliers. Most every supplier Apple utilizes today has seen margin pressure except Intel, although you can say Intel has sacrificed PC unit growth. My read is that if Intel continues to increase its process technology lead, than Apple for many reasons will leverage Intel across most of its platforms and pay Intel healthy margins. For Apple to not leverage Intel would mean that they have decided not to unlevel the playing field with their biggest competitor: Samsung.

FULL DISCLOSURE: I am Long AAPL, INTC, QCOM and ALTR