Is Intel late to CE party?

A seemingly almighty Intel (INTC) faces one of its biggest threats to date as major PC vendors such as Compaq Computer and Hewlett-Packard opt for Hitachi's RISC processor to run Windows on their handheld PCs.

Intel, which usually covers all of its bases in the processor market, now finds itself without a real product offering in the potentially large market of devices designed to run Microsoft Windows CE, a scaled-down version of Windows 95. Since product niches like this have a way of taking on a life of their own, Intel could find itself out of position if handheld products metamorphose into PC-like devices.

"This is a market segment where PCs and [handhelds] could overlap and seriously erode Intel's presence," said Dean McCarron, a principal at Mercury Research, a Scottsdale, Arizona-based market research firm.

For example, Compaq executives stated at Comdex that its Windows CE Companion, currently a diminutive device weighing only 13 ounces and sporting a small LCD screen, could eventually be transformed into a subnotebook with a larger screen and larger keyboard.

For now, the processor of choice for these CE devices is manufactured by Hitachi. The company's SH-3 RISC processor is now being used in Windows CE products including Compaq's Companion, Hewlett-Packard's upcoming handheld PC, and as Casio's Windows CE computer.

"This is great. Look at all these [Windows CE handheld PC vendors] using Hitachi's processors. This may change Intel's position of strength in the market," said a Japanese engineer at large Japanese electronics firm, who asked not to be identified.

"Intel's a near-monopoly right now. This could open the market up," echoed McCarron. "From what I understand, many of these vendors don't want to use Intel processors," he added, alluding to Intel's reputation for being high-handed with certain PC makers.

Moreover, top-tier vendors state on the record that Intel has nothing to offer them. "There really isn't any alternative [from Intel]. We just want to use the best price-performance chips available," said Mike Winkler, head of the PC products group at Compaq.

In fact, the only real alternative to the Hitachi processor at this point is NEC's MIPS RISC processor, the chip that NEC is using in its own Windows CE handheld device.

The market potential for these kinds of alternative RISC processors doesn't begin and end at handhelds. "Look at Net phones, TV web browsers, and hardware. This is a large information product market where Intel doesn't have a presence," said McCarron. That means potentially diminished market clout for Intel.

Of course, it's too early to count chickens. Profit margins for processor vendors in the handheld PC market are relatively low and there is no guarantee that consumers will snap up these devices in sufficient quantity to make up for the low profit margin.

If it looks like it will take off, McCarron says that Intel is not one to sit back and watch a potentially huge market take off. "If these products become successful, Intel will respond."

Intel already has a 486-class low-power processor called Hummingbird and has said in the past that it intends to develop a Pentium processor for the embedded processor market, a market that could include handheld PCs.

It's also in a strong position to win over many of the vendors now using Hitachi chips. Compaq's Winkler said that if Intel offered a compelling processor, he would seriously consider it in his future products.