PHOTOS: SIEMENS, MOTOROLA, NEC, NOKIA;PHOTO MANIPULATION: MICHAEL R. VELLA

Buried beneath the bad news about canceled projects coming from Intel Corp. this past fall was the announcement of a breakthrough that has the potential to radically alter the Santa Clara, Calif.-based company's course. We're not talking about a faster transistor or a quantum dot laser but about a strategic partnership to develop the company's third-generation cellphone system-on-chip. Code-named Hermon, after the mountain straddling the borders of Syria, Lebanon, and Israel, the new cellphone chip will be customized for phones that use Nokia's Series 60 user interface software in conjunction with Symbian's mobile operating system.

Besides this 3G alliance, Intel will work with Symbian Ltd., based in London, to develop a reference platform for Symbian-run 3G phones so that third parties can quickly design and manufacture the advanced Hermon handsets. Symbian's operating system, according to John Jackson, a senior analyst with The Yankee Group, Boston, ran more than 60 percent of the 19 million smart phones shipped last year.

Overall, 2004 was a year to forget for Intel, the world's largest chip maker, despite that year's estimated US $30 billion in revenue. Even as it tried to expand out of the mature PC and server markets, it found itself fighting a rear-guard action over low-end and high-performance microprocessors against archrival Advanced Micro Devices. In October, it canned the 4-gigahertz incarnation of the Pentium 4. That same month, it also killed the much-hyped liquid-crystal-on-silicon projection chip for high-definition televisions.

At the same time, while the trademark XScale microprocessor dominates the 15 million-unit-per-year PDA market, that's chicken feed compared to the burgeoning cellphone market—and everybody knows that quite well at Intel, from the tailored suits who run the company to the bunny suits who run the fabs. None of the 635 million handsets sold every year have Intel microprocessors inside, even though many feature Intel memory chips.

Intel's new alliance with Nokia, the world's largest handset maker, surprised some observers whose low expectations had been shaped by the chip giant's failure thus far to break into the highly competitive market for cellphone chips. Handset makers had ignored Intel's 2.5G-cellphone chip, code-named Manitoba, which the company had promised would ship in volume in 2003 but never did.

Manitoba was doomed to vaporware oblivion because Intel tried to enter a market already sewn up by incumbents Agere, Freescale Semiconductor, Infineon Technologies, Qualcomm, and Texas Instruments. Combined, those companies account for about 80 percent of all cellphone microprocessors and baseband chips sold, says William Strauss, a wireless analyst and president of Forward Concepts, Tempe, Ariz.

Learning from past mistakes, Intel placed Hermon in a better position than its predecessor to succeed in smart phones—handsets that let you read Web pages, send e-mail and instant messages, snap and send photos, play three-dimensional games and MP3 music files, organize personal information, and run applications like spreadsheets. To start with, the chip is aimed at a nascent market in which all the major handset makers and chip providers are still positioning themselves—only 24 third-generation handset models are being sold in the entire world right now, according to The Yankee Group's Jackson [see table, "Third-Generation Cellphones"].

Second, to develop Hermon and better leverage a position in the emergent 3G market, Intel reorganized internally. Early last year, its communications group, which had concentrated on network processors, absorbed the wireless communications and computing group, which made microprocessors for wireless networks and handsets. Sean Maloney, head of the latter, took over the helm of the expanded communications group from Ron Smith, who was shown the door. Maloney is aggressively pushing WiMax, Wi-Fi, and 3G cellphone chips.

With Hermon, Intel is better positioned to succeed in the smart phone market

On paper, at least, Hermon matches up well to similar offerings from the cellphone chip Big Five, particularly TI's Open Multimedia Applications Platform (OMAP) for smart phones, according to analysts who have been briefed by Intel on the technology. (The company, still smarting from the Manitoba flop, declined to share Hermon's technical details with IEEE Spectrum beyond general descriptions of what it cryptically calls an "unannounced preannounced product.").

On a single chip made in a 130-nanometer process, Hermon combines an XScale microprocessor, a flash memory, a camera interface, and a dual-mode baseband digital signal processor that will handle both wideband code division multiple access (W-CDMA) and GSM/GPRS modes—everything a smart phone needs except the radio. A lot of the development work on the processor was done by Intel's Haifa, Israel, lab, which is near Mt. Hermon.

Hermon will also feature "3G clear connection technology." That, claims Intel marketing manager David Rogers, will improve a phone's ability to track base stations and ensure smooth handovers from one station to another, enhancing call quality and decreasing the number of dropped calls.

Another advantage will be the potentially wide range of software available for Hermon-based phones, because Intel makes it easy for developers to port PC programs like spreadsheets and databases to the cellphone, Rogers adds.

Intel intends to sell Hermon chips at a price that will "deliver a 3G mainstream phone" for 20 percent less than current rival single chips and chip sets, according to Rogers, enabling handset makers to produce W-CDMA phones for less than $200. The demand for these is expected to top 54 million units in 2005, according to The Yankee Group.

But there is a little chicken-and-egg problem for Intel to solve first. Before the company can reach the volumes necessary to make a cheap Hermon chip, it needs some customers. While Nokia has not yet publicly committed to buying any Hermon chips and isn't likely to totally spurn its leading chip supplier, Texas Instruments, for a chip Intel has yet to prove it can manufacture in quantity, at least Intel has a foot in the door.

"The announcement [of the Hermon alliance] is not a statement saying that Nokia will now use Intel chips in our phones—nor does this change our relationship with TI," Nokia spokesperson Laurie Anderson confirmed. "Intel, Nokia, and Symbian are collaborating to help bring Series 60-based smart phones to market using Intel technology. This collaboration will complement our Series 60 offering for handset manufacturers, operators, and developers."

More important, Intel has the patience, and the deep pockets, to stay the course whether or not Hermon succeeds. Notes Forward Concepts' Strauss, "With double-digit billions in cash, they will eventually get into the market."