NTERNET OF THINGS AND DATA CENTERS LIFT INTEL IN Q2: US chipmaker Intel has historically relied on sales of its PC processors to generate the lion’s share of its revenue. While PCs still account for the largest piece of Intel’s net revenue pie, the steep decline of PC shipments have hurt Intel revenues. PC shipments dropped to 66.1 million in Q2 2015, the second consecutive quarterly shipments decline.

In the wake of PC’s deceleration, Intel is looking to expand its chip offerings to power other types of devices, and the Internet of Things (IoT) and data centers are becoming critical to that strategy, according to Intel’s Q2 2015 earnings report.

• Revenues from PC processors are decaying quickly. Revenue from the PC division shrank by 14% YoY. Despite this significant YoY decline sequential PC-generated revenue did see a 2% uptick.
• Data centers and the IoT are the key segments of growth for Intel. Both categories saw strong YoY and sequential revenue growth (see chart, below).
• Data centers and IoT are starting to account for larger shares of Intel’s total revenues, underscoring the growing importance of these divisions. The IoT made up 4.2% of net revenue in the most recent quarter, up from 3.9% in Q2 2014. Data centers ticked up from 25% of net revenue in Q2 2014 to 29% in Q2 2015. 
• Conversely, PC’s share of total revenue is shrinking. The category shrank from 63% of total revenue in Q2 last year to 57% in the most recent quarter.

While the slowdown of the PC division of Intel is telling for the chip industry, perhaps the most important takeaway from the company’s earnings call was not the company’s ability to sell chips to certain divisions, but rather the increasing challenge in how to make the chips themselves. Intel announced that it was expanding the 2-year chip release cycle it has used so far to 2 and a half years. Subsequently, Intel will release a third round of its 14 nanometer chips before pushing 10nm chips to the consumer market. Intel’s 10nm chips, which were originally expected to hit the consumer market in 2016, will be pushed to mid-2017 at the earliest.

Intel’s longer chip production timeline suggests that as each chip iteration becomes more advanced, it’s increasingly challenging for companies to innovate quickly enough to make exponentially better products in a 2-year timeline. In the near-term this means that the rapid advancement of mobile technologies will see a subtle slow down. In the long term is means that after the industry reaches a viable 5nm chip sometime around 2026, advancements in processors will likely slow considerably.

PHABLETS TO OVERTAKE TABLETS SHIPMENTS IN 2015: A stagnating tablet market and surging consumer adoption of large-screen smartphones, referred to as “phablets,” will propel global phablet shipments ahead of tablets for the first time this year, according to a new report from IC Insights. Phablets, which combine the functionality of a smartphone and a tablet, have been cannibalizing tablet sales for a few years, and the release of the large-screen iPhone 6 Plus has helped further catalyze this trend.

• Phablet shipments are set to grow by 66% this year to reach 252 million units. This growth will be helped along by the launch of Apple’s newest version of the iPhone 6 Plus in September and Android’s newest Galaxy Note sometime in August.
• Tablets are expected to see shipments growth of just 2% to reach 238 million units in 2015, up slightly from the 234 million tablets shipped in 2014.
• Phablets are cannibalizing smaller smartphone shipments, too. IC Insights predicts phablets will account for 17% of all smartphone shipments this year, and that share will increase to 21% in 2016 and 30% in 2018. 

The phablet category is expected to continue expanding its lead over the tablet category through 2018, when phablet shipments will be more than double that of tablets, according to IC insights.

The data corresponds with another report showing growth in “active users” on phablets. As shipments have risen, phablets have been slowly winning share of all active users from other mobile device categories, according to a separate report from Flurry (see chart, below). While just 3% of active mobile users globally were on phablets in February 2013, that share had jumped to 20% just over two years later, in March 2015. Phablets stalled the active user share growth of small tablets and shrunk that of medium and small phones as well as full-sized tablets.  It’s expected that the phablet device category will continue to increase its share of all active users as more smartphone users on both Android and iOS upgrade to large-screen devices.

CHEAP SMARTPHONES DRIVING ADOPTION IN MIDDLE EAST AND AFRICA: The Middle East and Africa (MEA) region saw smartphone shipments grow by 66% year-over-year (YoY) in Q1 2015 to 36 million units, an uptick that puts the region on track to see 155 million smartphone shipments this year, according to the IDC. MEA’s big Q1 was partially assisted by a significant portion of feature phone consumers upgrading to smartphones.

• Smartphone shipments are overshadowing feature phone shipments. Smartphones accounted for 63% of all mobile phones shipped in the Middle East in the quarter, and 47% of all mobile phones shipped in Africa in the same period.
• Feature phones are fading. These more basic devices saw a 20% decline in shipments YoY and are forecast to shrink to 27% of all MEA handsets in 2019.

Android is faring particularly well as smartphone penetration expands in MEA. The Android platform accounts for 80% of device shipments in the Middle East and 89% of shipments in Africa. Apple’s iOS devices, on the other hand, account for 17% and 7% of shipments, respectively. The affordability of Android devices is a big part of the platform’s success in the MEA region; phones priced under $200 accounted for 36% of the phone market in the Middle East in Q1 2015, a price bracket that’s dominated by devices running Android. This breakdown highlights Android’s enormous opportunity in emerging markets, where Apple’s high-end devices are cost prohibitive.

MICROSOFT TO EXPAND SURFACE DISTRIBUTOR COUNT BY THOUSANDS: Microsoft plans to expand the number of partners that can distribute its Surface 2-in-1 tablet from a few hundred to somewhere in the thousands, the company announced during its Worldwide Partner Conference Monday. The company is chalking up the need for significant channel expansion to strong demand for the Surface Pro 3, the Surface 3, and the Surface Hub. More importantly, Microsoft anticipates that, on top of this preexisting momentum, demand for these devices will see a significant upswing from the impending release of Windows 10.

This is a significant uptick at a crucial time. Microsoft had just 20 Surface distributor and reseller partners last fall and, at that time, industry players blamed Microsoft’s limited distributor approach for its failure to break into the enterprise market early in the Surface’s release. Microsoft’s decision to address this shortcoming now is well-timed: While the tablet market as a whole has stagnated over the past few quarters, shipments of 2-in-1 devices, which appeal to the enterprise, are expected to grow, a fact that Microsoft is going to leverage. If past sales figures are any indication, Windows tablet sales will be particularly strengthened by the addition of so many more distributors:

• Microsoft alone shipped more than 2 million Windows tablets in Q4 2014, a quarter in which Windows tablets as a whole – including from Microsoft and other Windows tablets sellers – shipped 6 million units and accounted for 9% of the tablet market. 
• Even if shipments of third-party Windows tablets just hold steady, Microsoft-branded tablets such as the Surface product line will see a big lift from such drastic distributor growth.

While these software, hardware, and partnership developments suggest that prospects look good for Microsoft’s tablet line, the company must still win back market share from Apple, which currently holds ~30% of the tablet market (see chart, below). Apple’s hold on the industry will be difficult to loosen, especially because the company is expected to launch its long-rumored large tablet (unofficially referred to as the iPad Pro) this fall, and the company’s partnership with IBM to make enterprise apps gives it extra appeal to businesses.

EMPLOYEES WANT TO KEEP PERSONAL AND BUSINESS ACTIVITIES ON MOBILE SEPARATE: The practice of using personal devices for business purposes, formally known as bring your own device (BYOD), has become increasingly popular, and businesses are struggling to keep pace. The large majority of employees in the US, UK, and Spain want to keep their personal and business tasks and communications separate, according to new data provided to BI Intelligence by telecom-web convergence company tyntec. Despite the high degree to which employees use mobile devices outside of the office, few businesses have satisfactory, if any, official BYOD policies. Here are some problematic areas highlighted by the data:

• Nonreimbursed expenses are a big concern for employees who opt to BYOD. Less than half of all employees in the surveyed markets receive reimbursement for work-related use of their personal phones.
• Most employees spend a significant amount of time completing work-related tasks on mobile devices outside of working hours. In the US, 37% of employees spend more than 10 nonoffice hours completing work-related tasks on mobile. That share stands at 19% in the UK and 38% in Spain.
• Companies that have BYOD policies, and employees who complete work-related tasks on personal mobile devices without official BYOD policies, are unlikely to have or encourage the use of business apps. Just 5% of US employees using their personal devices for mobile work tasks use business apps. This likely reflects a dearth of work-related apps created by companies with BYOD policies.

Notably, while more than half of US consumers use their personal phones for work in some capacities, just 34% of these employees work for companies that have BYOD policies in place. At the same time, 74% of US employees would ideally choose to have two separate phones for work and personal use, or one phone with two separate numbers. This highlights the gap between how employers are approaching BYOD work environments and what employees need in them.

PC MARKET CONTINUES DECLINE: PC shipments continued their sharp decline in Q2 2015 after a rough first quarter, according to the latest report from the IDC. Shipments dropped to 66.1 million in Q2, down from 68.5 million in Q1, which had previously been the lowest PC shipment volume in recent history.

• This shipment drop represents a decline of -11.8% year-over-year (YoY).
• The US market saw 16.4 million PC shipments in the quarter, representing a YoY decline of -3.3%. 
• Apple is the only vendor to have grown its PC shipments YoY, according to the IDC’s data.

• Oddly enough, Apple doesn’t make the top 5 vendors in competing research firm Gartner’s PC report.

Numerous factors such as inventory reductions related to the impending release of Windows 10, longer PC lifecycles, and uncharacteristically strong sales in Q2 2014 have resulted in the steep growth decline. The PC market is likely to somewhat stabilize in 2016, though it’s expected to continue its decline through the rest of 2015.