Who Gains if Tablets Continue Explosive Growth? (INTC, MSFT, ARMH, QCOM, AAPL, NVDA, GOOG)

Could tablet computers be the most serious threat to the Wintel duopoly that has dominated personal computing for the past 25 or so years? Intel Corp. (NASDAQ: INTC) and Microsoft Corp. (NASDAQ: MSFT) dominate the market for desktop, notebook, and server computing, but neither has demonstrated any success, so far, with any sort of mobile computing device, be it a smartphone or a tablet.

The dominant chip makers for the mobile market have been Qualcomm Corp. (NASDAQ: QCOM) and ARM Holdings plc (NASDAQ: ARMH). Qualcomm’s Snapdragon processor is the CPU of choice for many smartphone makers, while ARM’s processor has gained ground in smartphones and could be the leader in tablet CPUs. Apple Inc. (NASDAQ: AAPL), whose iPad tablet has sold millions of units since its introduction in April uses a processor that uses ARM technology. Nvidia Corp. (NASDAQ: NVDA) also plays in the market with a ARM-based dual-core chip that is gaining traction in the tablet market, though it didn’t attract much interest from smartphone makers.

Why this is important now is because analysts at Goldman Sachs have predicted that tablet sales will replace up to 35% of PC sales, leaving the PC market with a mere 8% growth rate for 2011.  This projection is considerably worse than a November projection from Gartner that PC sales in 2011 would grow by 15.1%. The Gartner forecast noted that tablets and smartphones would cannibalize some 10% of PC sales by 2014. Goldman’s analysts are not so sanguine on prospects for PCs.

Goldman analysts expect some 54.7 million tablets to be shipped in 2011, more than 500% more than were shipped in 2010, when Apple’s iPad was the only game in town for most of the year. New devices using ARM-based processors and Apple’s iOS or the Android OS from Google Inc. (NASDAQ: GOOG) pose a genuine threat to the Wintel PC for the first time since the PC revolution began, nearly 30 years ago.

Intel’s recent acquisition of Infineon could help it get back into the thick of the fight for CPU share, but a recent win for Nvidia with Samsung could indicate that tablet makers want to get a product out the door sooner rather than later. Imagine that.

And there’s no sign that Microsoft’s promised tablet computer running Windows 7 will appear any time soon. This is a market space that even Microsoft’s billions won’t be able to sway if the company can’t deliver a viable product very soon.

So far, Qualcomm has not been a player in the tablet CPU business. That position has been left to Nvidia, which Taiwan’s Digitimes reports has orders from HTC Technology, Asustek, MSI, and Toshiba, as well as Samsung, for Nvidia’s Tegra 2 processor that combines high graphics capability with low-power requirements for tablet computers. Microsoft used the chip in its Zune HD and Kin smartphone.

Digitimes also notes that the Tegra 2 chip is the processor in the Droid 2 phones and a new netbook computer from Toshiba. A new competitor for the company’s Atom processor, the chip of choice for netbooks, could cause even more heartburn at Intel.

If tablets do, in fact, explode in the market as Goldman thinks they will, Apple’s market share for all kinds of personal computing devices could jump to 12% according to The Wall Street Journal’s All Things Digital blog.

Another winner could be Google, which is about to release a version of its Android OS, code-named Honeycomb, especially for tablets. Yes, Google gives Android away, but if enough hardware makers sell enough tablets using Honeycomb, Google’s advertising platform will grow exponentially, and that is where Google will take its share of the profits from tablet computing.

Nvidia is also very well positioned to prosper. The company’s dual-core ARM-based CPU is set to be the chip of choice for Android-based tablets. ARM, itself, licenses its technology to Intel, Apple, and Nvidia. If tablet sales grow as Goldman analysts expect, ARM will also do well.

Intel has promised delivery of competitive netbook and tablet processors in 2011, and the company’s pricing power should not be underestimated. These guys play hardball all the time.

The battle for dominance in tablets is just starting, and it will be knife fight before it’s over. It pays to remember that there are no rules in a knife fight.

Paul Ausick