March 4 2008: 12:19 PM EST
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Intel seeks salvation in WiMax

Hard hit by falling prices and PC sales, the No. 1 chipmaker ups its risky bet on the future of wireless broadband.

By Scott Moritz, writer

Future of wireless
Qualcomm CEO Paul Jacobs talks about the company's big bet on mobile TV and the technology he's keeping a close eye on.

NEW YORK (Fortune) -- Intel's got a big problem. With component prices falling amid weakening computer spending, the giant chipmaker is betting heavily that WiMax is the future of wireless broadband. That's an expensive gamble.

And it's not exactly what investors may want to hear right now. The Santa Clara, Calif. chip giant warned late Monday that a steep drop in its flash memory prices will eat into 2008 projected margins. The news comes just days after Dell (DELL, Fortune 500), a key Intel customer, reported another disappointing quarter on falling PC sales.

Intel's dimmed outlook dampened tech stocks Tuesday, adding more pain to what has already been a terrible 2008 for tech investors. Both the Nasdaq Index and Intel (INTC, Fortune 500) shares were down about 1% in morning trading. So far this year, the index is off by 16%. Intel shares have slid 25 percent year-to-date.

All eyes will be on Intel's analysts' conference Wednesday, where soothing jittery investors will be the chief objective. That could be a tall order: Some analysts and investors expect Intel to double-down on its bet that WiMax, an unproven successor to WiFi, will dominate wireless broadband. Through its financing arm Intel Capital, the company is expected to invest about $2 billion in a WiMax networking joint venture between Sprint (S, Fortune 500) and Clearwire.

If so, the move promises to give a much-needed boost to the WiMax movement, which seems uncomfortably close to collapsing. And there's no guarantee that even with Intel's support, WiMax can survive. Sprint, for instance, is looking to spin off its costly WiMax effort. Craig McCaw's Clearwire venture - a largely rural wireless broadband network operator - is rapidly running out of cash. Clearwire (CLWR) cut its 2008 revenue target Tuesday and told analysts on its conference call that it was exploring its WiMax options.

Not long ago, WiMax was seen as the next step in wireless broadband. Picking up where WiFi left off, WiMax promised to expand high-speed Internet access to a much broader market, including mobile.

It hasn't turned out that way. Aside from a few overseas markets, the WiMax effort has been at a standstill. The country's largest wireless telcos, AT&T (T, Fortune 500) and Verizon Wireless (VZ, Fortune 500), have gambled instead on a different technology, long term evolution (LTE), to upgrade their networks to 4G mobile broadband. The moves were a blow to Qualcomm (QCOM, Fortune 500)'s so-called OFDM technology for wireless broadband and have further fueled doubts about the future of WiMax.

Analysts say that this is a desperate time for WiMax and that Intel's cash could at least give the technology a second wind.

For Intel, the WiMax payoff could be huge. The company is effectively helping to underwrite a national network that, if successful, will need millions of devices powered by WiMax chips. Intel said last year that it is developing a WiMax/WiFi chip.

By jumpstarting WiMax at a critical time, Intel might just succeed in turning Wall Street's attention away from its place in a drooping PC market. To top of page