Intel is looking to reinvent itself.

With PC shipments reportedly in free fall, the company reported a sharp decline in its quarterly profits last week, which isn’t surprising, given that the company’s PC chip division accounted for 64 percent of its total revenue and 89 percent of its operating income in 2012. The company reported net income to $2.05 billion, a decline of 25 percent from $2.74 billion in the period last year.  However, analysts at IHS believes Intel has the innovation to stay on top this year, but other reports from decision makers at the semiconductor chip giant have indicated that Intel might have something new up its sleeves.

Uncertain environment at Intel

Intel became the world’s largest semiconductor maker after developing a partnership with Microsoft, and together the two companies have dominated the PC industry for 25 years. But 2013 is proving to be treacherous for the PC industry. The previous IHS forecast predicted global PC shipments would rise by 3.4 percent in 2013. However, given the dismal results in the first quarter, it appears that shipments are unlikely to achieve growth for the year. IHS downgraded its forecast for worldwide PC shipments to be flat at best, but the market is more likely to suffer a 1 percent to 2 percent decline. This follows a dismal 2012, when global PC shipments decreased by 3.3 percent, the first decline in 12 years.

“The PC Industry is facing major challenges as it struggles to find a place in the consumer’s budget amid the rising popularity of the lower-priced media tablet,” said Craig Stice, senior principal analyst for compute platforms at IHS. “Windows 8 has yet to trigger a new PC replacement cycle. While there have been many new product introductions intended to revitalize the market, like the ultrathin mobile PCs and convertibles with touch screens, it seems consumers have yet to discover the return on investment for these higher-priced systems.”

For the most part, Intel reacted with great agility to weakening demand for its products, cutting down its inventories very rapidly in the fourth quarter of 2012 to avoid being stuck with excess stockpiles, according to IHS. The company in the fourth quarter was the most aggressive of all semiconductor suppliers in reducing its inventories, cutting them by 11 percent, or $585 million, compared to the third quarter of 2012—the largest decrease on a dollar basis of any chipmaker during the quarter. Intel’s inventory liquidation partly was due to a reduction in production as the company migrated to a new process technology for manufacturing its chips: 14nm lithography.

Sales of netbooks, a product Intel dominated with its Atom family of low-end processors, have been badly impacted by the downturn in the PC market as well as the growth in the media tablet.  Netbook shipments this year are forecast to amount to just 3.97 million units, down a gut-wrenching 72 percent from 14.1 million units in 2012.

The demand for Intel’s other big source of revenue, chips for computer servers, is evolving, too. Basic servers are relying more and more on cloud computing, creating opportunities for new competitors to develop cheaper designs as the simpler method drives down prices (and, ultimately and unfortunately, profit margins).

Mobile devices and an unexpected move: The surprising bet that could save Intel

Despite Intel’s travails, IHS says the company is expected to continue to maintain its leadership in the global semiconductor market at least through 2013. However, Intel is betting on investments in the mobile market and, surprisingly, pay-TV to carry it even further than that.

According to the New York Times, Intel had been criticized for its lethargic reaction to the rise in the mobile market. Intel in 2012 held a 5 percent share of the market for digital baseband and applications processors used in mobile phones and other mobile devices. Intel is pushing to expand this product line this year. Aside from its legacy Infineon business, Intel had seen some design win activity from its Atom product line in smartphones from Lenovo, Motorola and various Chinese brand OEMs. Furthermore, Intel has introduced its LTE platform.

“IHS expects Intel to continue to attempt to build off these early wins and ramp penetration in the mobile platform market—specifically in smartphones,” said Francis Sideco, senior director for consumer electronics and communications technologies at IHS. “However, even if Intel is successful in this area in 2013, it won’t enjoy rapid growth, but rather slow and steady progress. The company faces significant challenges because of the momentum and positioning of strong incumbents such as Qualcomm, which holds a market share in the mobile-phone semiconductor business that is currently seven times larger than Intel’s.”

However, its greatest departure is its plans for selling a television set-top box and subscription service, which Intel officials say will offer enough regular television content to serve as a substitute for a cable subscription. Variety magazine’s Andrew Wallenstein recently spoke with Erik Huggers, head of Intel Media, the company’s most secretive division, to get the inside scoop on what Intel plans to offer.  Huggers didn’t reveal much to Wallenstein, but here’s what we know:

• Intel intends to allow subscribers to purchase a package of broadcast and cable channels that will be supplemented by various VOD options. The package will also be available across mobile devices.
• Intel will not be offering a la carte channels. The programming partners (such as Time Warner, News Corp., Disney, Viacom, etc.) will never go for that. But Intel has also hinted there might be more flexibility in the bundles of channels offered, as opposed to what consumers get with basic cable.
• Intel has also made clear that its new device is not expected to come in at a lower price point than most other pay-TV services. Instead, what will make Intel’s device unique is a user experience that is “touted as a quantum leap over the traditional multichannel set-ups that have been rendered anachronistic by innovators like Apple and Netflix.”
• Intel has confirmed that the device will come with a camera that will recognize which viewer in a household is watching so as to personalize the programming (and presumably advertising) to individual tastes. But don’t worry, the company made clear the feature can be turned off.

New Intel leadership could also play a role in its reinvention

And in the midst of the chaotic and uncertain technological revolution, Intel is also scrambling to find a new leader. In November, Paul Otellini, who had been CEO since 2005, caught everyone off guard when he announced his resignation, saying that it is time to transfer Intel’s helm to a new generation of leadership. Otellini declined to provide further information on why he was leaving just three years short of retirement age.

While Intel has yet to indicate a main candidate for the role, Chairman Andy Bryant may offer insight into what Intel is looking for. The New York Times reported that Bryant tells employees at meetings that Intel must fundamentally change, even if the computer chip maker still has what it takes to succeed in engineering and manufacturing.