INTEL : Wanna Be the King

T here is no single reason for Intel’s
rapid strides in the field of communications that have been taking everyone by
surprise. Dropping chip prices and wafer-thin margins, coupled with growing
competition from rivals like AMD and Cyrix, could be the main reasons. After a
long period of about 30 percent CAGR, Intel was growing only at about 8 percent
in the last two years. However, other reasons are equally relevant. First,
networking, communications, and convergence are emerging as a multi-billion
dollar opportunity for microprocessors that facilitate this, as well as for end
products based on such microprocessors. Secondly, Craig Barrett, the man who
replaced Andy Grove in the driver’s seat, is the one who saw these
opportunities and is ready to take risks.

All this started over two years back,
when Grove stepped down to make way for Barrett. The new chief decided to look
at life and opportunities beyond the PC microprocessor. Since then, the
traditional chip maker has been trying to shed its image of a conservative
company wedded to microprocessors, is adopting new business philosophies, and
moving into newer areas. These include semiconductors for networking and
wireless products, networking products, new-generation information appliances,
and even funding seed projects as a venture capitalist would do. The chipmaker
is now into Internet servers, e-commerce, web farms, and wireless phones, thus
increasing its list of competitors. Intel was just not there in the
communications market, which is much bigger than its computer counterpart. This
move is aimed at trying to give Intel the same position it has in the computer
market. While Intel expects to give its operations, revenue, and image a major
boost with this new look, the fact is that it will be taking on giants like
Motorola, Lucent, Cisco, Nortel, Alcatel, 3Com, TI, Exodus, and IBM.

The New Formula

More than market opportunities, it is
the technology evolution that is guiding Intel. The belief behind Intel’s
decision to get into communications and networking in a major way is
interesting. "We believe that networks are growing rapidly with increasing
amount of silicon content. And silicon is our strength area," says Tom
Franz, vice president and general manager, Network Processing Group, Intel. This
is quite obvious too. So many networks, networking products, and networking
terminals that are coming up, will need to understand each other. Also, they
will have to be much more intelligent and have a lot more processing power. Just
like the PC chip was the building block in the PC era, the networking chips that
will be the building-blocks in the Internet era. "Intel wants to be the
building-blocks provider for the Internet era," adds Franz.

The first step was to go beyond the PC
chips. About a year back, Intel announced a new family of chips for networking
equipment that speeds up data transfer on the Internet. Networking processors is
over $7 billion market, and is growing at 30 percent more than PC processors.
Intel has also decided to sell information appliances like screen phones, e-mail
stations and TV set-top boxes. In the process, Intel will be taking on
networking giants like Cisco. "If we want to be the king in networking,
then we better go after them at the earliest," says Donald Smith, vice
president and general manager, Wireless Communications and Computing Group,
Intel.

Intel is not stopping at new product
launches. Wherever needed, companies are getting acquired. Last October, Intel
bought DSP Communications, which is in the forefront of digital wireless phone
technology, for $1.6 billion. Other crucial acquisitions include networking
chipmaker Level One, and Dialogic, the undisputed king of computer telephony
integration. Over $6 billion has been spent in acquiring 12 companies to
strengthen Intel’s products.

To become a communications company and
to grab emerging opportunities, Barrett and his new team of managers are
learning to think in all directions. It is setting up server farms to run web
sites and e-commerce sites for other companies. Internet data services is
estimated to be a $3 billion market worldwide, and is estimated to be growing
more than 100 percent each year. Intel has invested roughly $1 billion on these
farms by March 2000. A product company’s movement into services is something,
which is worth taking note of, and displays courage and vision, the most crucial
requirement for technology and market leaders.

Purchase of DSP Communications and the
JV with Analog Devices, a new digital signal processor chip, could give Intel a
major hold in the wireless chip technology market place. It is already the
biggest supplier of memory chips for cellular phones, but by combining DSP’s
software with its own StrinARM processor, Intel could be a major player in the
wireless chip arena. In 2000, 85 million chips are to be supplied, but by 2003
this demand will go up to 536 million units. The $7 billion wireless chip market
is expected to grow at over 20 percent, and established players like Lucent,
Motorola. Conexant and IBM are drawing up aggressive plans.

Restructuring for Leadership

To achieve what Intel wants, a major
step has been the organizational re-structuring into five major divisions. Intel
was earlier a processor-centric organization with a lot of centralized
management. The first thing Barrett did was to set up five groups, four out of
which are primarily about communications. Ambitious as he is, Barrett wants each
one of his units to be $1 billion plus businesses, and market leader too. The
new initiatives will help Intel grow by about 20 percent–a considerable jump
from the 8-percent growth during last two years.

Next he has ensured that financial
management in the company is made a little more liberal to not miss out
opportunity. An amount of $1.2 billion was kept aside to fund acquisitions,
equity investments, and internal start-ups.

The New Businesses Group is one of the
most interesting groups. Its job is to ensure that new ideas in the organization
are promoted. Setting up server farms and funding innovative start-ups around
the Internet are some of the areas that this Group has been focussing on. Intel
has already invested money in over 350 software and Internet companies
worldwide. About 30 internal start-up projects have been funded till now and the
seed money ranges from several hundred thousand dollars to $10 million. The
projects range from online medicine applications to real-time information system
at sports complexes and from online computers for diet and fitness monitoring to
technology for online content protection. Though all these projects may not be
completely in the realm of communications, they certainly are about applications
that depend on communications. "Intel feels that the future is networking
and that’s why a lot of our developmental efforts are in that direction,"
says Franz.

This is the second time Intel is
shifting gears. In 1985, the company re-oriented itself from being a memory chip
manufacturer to a microprocessor maker. That was under Andy Grove, the man who
beeved that only the paranoid would survive in an era of such cut-throat
competition. And from then onwards, Intel had never looked back, and focussed
solely on PC chips. It’s only in the last two years, since Barrett took over,
that Intel started looking at new opportunities.

Though he has successfully
re-structured the company to achieve its goals, he has gone on record saying
that Intel has been dominated so much by microprocessors, other businesses could
not come up around it. The move towards this transformation has not been easy so
far and is not likely to be easy in the near future too. While market pundits
would like to believe every word the industry has to say on Intel’s growth,
the technologists are not too sure about Intel’s expertise in new areas like
networking, communications, and Internet. Intel’s track record in networking
products like modems and video-conferencing has not been too encouraging. And
top of all this, all of Intel’s new initiatives are futuristic. Plus, there
are many established players in most of these areas. Also, to support the new
initiatives, it is important that Intel’s microprocessors continue to be the
cash cow. Many analysts feel that ever since Intel has started focussing on
these new areas, its performance on Pentium III chip development and delivery
has been questioned.

While it is true that Intel is getting
into an area where it does not have much experience, and that it may also be in
conflict with some of its own clients to whom it supplies products, the fact is
that Intel is an "outward looking" organization now. Considering that
the Internet-based world will have no dearth of opportunities, "Intel need
not be inside every networking product" to be the king.

Ibrahim
Ahmed