January 17, 2000

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Inside Intel:
Chips Come First

By Paul McDougall

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ntel's bread-and-butter remains its microprocessor business. Chips used to run PCs, workstations, and front-end and general-purpose application servers still account for the majority of its revenue--and that won't change any time soon. "We have this $20 billion thing that we describe lovingly as the largest single-cell organism in the world, and that's our 32-bit Intel architecture business," says CEO Craig Barrett. "It's still the heart of Intel and will be for several years."

Last week, Intel introduced a low-cost, 800-MHz Pentium III Xeon CPU to continue its momentum in the departmental server market. This week, Intel unveils a 650-MHz mobile Pentium III chip with SpeedStep technology that prolongs battery life by clocking down to 500 MHz when the host notebook isn't plugged in.

In the months ahead, Intel is counting on several new products to cement its dominance in the increasingly competitive client arena. In the first half of 2000, it will introduce Pentium III desktop CPUs with clock speeds in excess of 800 MHz, to be followed by a 1-GHz chip later in the year; its 750- and 800-MHz Pentium III chips shipped last month. Intel says new business applications--including the next wave of knowledge-management and speech-processing software--will require all that speed. "What we're looking at over three to five years is how the next phase of E-business gets enabled," says executive VP Otellini.

Users agree they'll need extra horsepower to run next-generation apps. "We'll be pressured to upgrade by streaming audio and video, voice-over-IP, and those types of applications," says Lee Congdon, senior VP for strategic integration and architecture at the National Association of Securities Dealers. "There might be excess capacity when we first install new desktops, but we'll have no problem sucking that up by the end of our three-year cycle."

Computer makers also say Windows 2000 will force many businesses to upgrade desktop systems. "It can only be fully leveraged with higher-speed processors," says Michael Cade, Vectra brand manager for Hewlett-Packard.

To ward off competition at the low end, Intel has scheduled a second-half 2000 introduction of a value-priced CPU for consumers with onboard memory and graphics processing. Intel will position it below Celeron, its standard consumer PC chip. Intel will also ship a 600-MHz Celeron in the first half.

Competition is pushing Intel to launch products at a frenetic pace. With the debut of its 750-MHz Athlon chip last year, Advanced Micro Devices Inc. went after Intel at the high end of the desktop market; this year, AMD will unveil a 1-GHz chip. "AMD keeps Intel on its toes and forces it to change its pricing on a consistent basis," says Creative Strategies analyst Tim Bajarin. An 800-MHz Pentium III CPU is priced at $851, compared with $849 for an 800-MHz Athlon chip.

But competitive pricing has been taking its toll on profit margins within Intel's microchip business--profits that Intel is counting on to help fund expansion into other markets. Meanwhile, despite the electronic supply chain it has painstakingly created, Intel's inability to meet demand in some instances has created problems. Gateway Inc. said last week it would resume offering Athlon systems after CFO John Todd said that "spotty and unreliable" supply from Intel cost Gateway $200 million to $250 million in revenue during its fourth quarter.

But Merrill Lynch analyst Osha says Intel's supply problems are mostly behind it. "The problem was they ramped a lot of new technologies in the fourth quarter when demand is at its peak," he says.

There's another potential threat to Intel's hegemony over the business desktop market: the attractiveness of thin clients as a platform for companies turning to application service providers. "It makes sense because these are very easy to manage remotely," says Jim Crocco, chief operating officer of thin-client manufacturer Netier Technologies Inc. Most thin clients rely on CPUs built by companies other than Intel, such as Via Technologies Inc.'s Cyrix subsidiary.

Joey Castaneda, VP for IS at Lube Management Corp., a Pleasanton, Calif., company that owns a chain of quick-lube garages and runs 50 thin clients from Wyse Technology Inc., agrees they offer benefits over PCs. "They've lowered our total cost of ownership, centralized maintenance, and allowed us to better monitor and control assets," he says. "With Microsoft Windows Terminal, we can run any application we want."

Intel shrugs off the threat. "I don't see a big move toward thin clients," says Sean Maloney, senior VP for worldwide sales and marketing. "There was more talk about that three or four years ago when we went through the whole network computer hyperbole wave."

INSIDE INTEL

Chips Come First

Back-End Push Heats Up

Networking Gains Ground

Hosting: The New Goal

Intel In The 21st Century

Intel: The R&D Strategy

Interview: Craig Barret, CEO of Intel

Illustration by Doug Ross
Photo by Gary Parker

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