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