Last updated: May 1, 2006 11:57 pm

Intel strives for new route to domination

Twenty years after Intel made a transition that changed the technology industry, the world’s biggest chipmaker is engaged in a soul-searching exercise it says could be of equal importance.

In the mid-1980s, faced with strong competition from Japanese manufacturers of D-Ram memory chips, Intel decided to get out of the business and focus instead on making microprocessors, the calculating brains of computers.

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The decision propelled Intel to domination of the emerging market for personal computers – its processors are still in four out of every five PCs – and its move sounded the death knell for most of the mainframe computer manufacturers that had held sway until then.

It was one of those “inflection points”, according to Andy Grove, Intel’s former chief executive, that could lead a business to new heights or signal the beginning of the end.

But the comparison by Paul Otellini, the current chief executive, last week of his 90-day strategic review with that turning point of two decades ago, has not rung entirely true with Wall Street. His promise of “the full commitment of the management team to make Intel a different type of company” left some with doubts at Intel’s analyst day in New York.

“That would be an old dog learning new tricks. This is not a company or a management team that has been willing to admit they are making mistakes,” says Charlie Glavin, analyst at Needham and Company and a former Intel employee.

He says Intel has failed to show the same kind of discipline as its rival Texas Instruments in getting rid of existing businesses that might compromise future growth.

Mr Otellini’s comments also suggested contradictions. While he promised “no stone will be left unturned”, he said the company structure of five divisions introduced more than a year ago would remain in place.

He predicted slowing PC growth this year – in high single-digits percentage-wise rather than the low double-digits forecast by market research firms – but still insisted Intel’s earnings would make a strong comeback in the second half after two poor quarters. “I think they are overly optimistic; you can’t say PC growth is slowing, but we are going to have our second-best second half ever,” says Mr Glavin.

Unlike 20 years ago, Intel is not facing a major challenge from Japan but a nibbling away at its market share by a much smaller Silicon Valley rival, Advanced Micro Devices.

AMD’s success is in part due to Intel’s miscalculations. The NetBurst micro-architecture Intel introduced five years ago was aimed at boosting processor speeds to as much as 10 gigahertz. But the heat the chips produced and the power required was untenable and none ever breached the 4Ghz barrier.

More recently, Intel has suffered shortages of the chipsets that accompany its processors and has had to resort to supplies from third parties. Meanwhile, AMD has introduced innovative processors that gave it 27 per cent of the server market in revenue terms in the last quarter, according to Mercury Research.

Intel has sought to expand beyond the maturing PC market with its new Digital Home and Digital Health divisions, a Channel Products division dedicated to bringing more affordable PCs to emerging economies and a Mobility division that aims to make inroads into mobile phones.

Sumit Dhanda, Bank of America analyst, says there is promise in Digital Home, with Intel predicting $1bn in revenues from its new Viiv brand in its first year.

“I also share their optimism on emerging markets: look at mobile handsets, once they hit a certain price-point, adoption turned out to be massive, emerging markets are now where 60 per cent of handsets are sold,” he says.

But the sources of savings of $1bn this year and a $300m cut in capital expenditure will not be fully clear until the strategic review is completed in the third quarter.

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