January 17, 2000

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Inside Intel:
Networking Gains Ground
By Brian Riggs

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ust about a year ago, Intel's primary network offerings consisted of a modest line of LAN switches and network interface cards. More than $5 billion later, Intel has radically altered its networking portfolio through investments and acquisitions designed to help it become a major player in business networking, wireless communications, and Internet technologies.

Among Intel's key moves are its $185 million acquisition of virtual private network company Shiva Corp.; the $780 million buyout of Dialogic Inc., which makes IP telephony hardware; the $500 million purchase of E-commerce system vendor IPivot Inc.; and the $1.6 billion payout for DSP Communications and its mobile wireless chip technology. Intel also entered into partnerships with networking powerhouses, including an alliance with Cisco Systems to jointly develop broadband access devices.

The buying spree isn't through yet. CEO Barrett says there's potential for the company to follow the DSP acquisition in the handheld chipset market. The communications industry, he says, "will move away from proprietary, vertical stacks to common building blocks and open interfaces. We want to be a common building-block supplier in that space. That's everything from silicon in network switches and hubs and routers and communications equipment to silicon in cell phones."

Indeed, Intel wants to be a brand name in the wireless market, which is expanding rapidly. Businesses are expected to spend $27.6 million in wireless data and voice services this year, up from $19 million in 1998, according to Cahners InStat. Late last month, Intel reorganized its network communications and computing enhancement groups. The latter group was rechristened the wireless communications and computing group; VP Ron Smith, who heads the effort, says it will actively look for new opportunities in the wireless market. The group will cede responsibility for all non-wireless products to the networking communications group run by VP and general manager Mark Christensen.

Intel's networking systems business has been growing rapidly. Products such as its Express line of switches and hubs compete with fast Ethernet and Gigabit Ethernet products in Cisco's and 3Com's product lines. In 1998, Intel had $116 million in revenue from its switch and hub business, up from $76 million in 1997, according to the Dell'Oro Group.

In particular, the company has carved out a niche in the workgroups and small- and midsize-business market. In the spring, Intel plans to enhance its offerings for growing companies with a multifunctional network appliance that will act "as an on-ramp to the Internet economy for small businesses," says John Miner, VP of Intel's communication products group. The device, which will be sold and deployed by Internet service providers, will incorporate messaging, caching, storage, print, Internet access, and routing features. Early this year, Intel will also release a caching appliance developed with Inktomi Inc., Miner says, and it's developing higher-capacity switches that can support a midsize business or campus network.

Still, Intel has remained a minor player in the cast of LAN systems characters, controlling little more than 1% of a market dominated by Cisco, Nortel, and 3Com. Analysts say that's fine, though. "Intel is not now, nor does it want to be, a traditional networking vendor" in the commodity hub and switch market, says Tom Nolle, an analyst at CIMI Corp. Rather, the company is driving its role as a building-block supplier by developing a new class of network processors and innovative turnkey solutions.

By focusing on new CPUs for high-end network equipment, for example, Intel can "break into a high-growth market without actually competing with established players," says Michael Wolf, an analyst at Cahners InStat. Key to this initiative is the Intel Exchange Architecture, the foundation of a line of programmable network chips that add intelligence to the network, says VP Christensen. The architecture was developed by Level One Communications Inc., which Intel bought last year.

Intel Exchange processors are designed to reduce the costs of network devices by allowing them to be built with general-purpose processors rather than application-specific integrated circuits. Intel Exchange processors can send programming instructions to switches, routers, and other networking equipment. The processor line competes with programmable communications chips from C-Port, IBM, and Sitera.

"Industry standards change every month. If the implementation of the standard was done in a custom, hard-wired component, the only way to upgrade the network equipment in the field when the standard changes is to replace the hardware," Christensen says. "With a programmable processor, all you do is a software drop to upgrade it for the change in the standard." So, in just weeks, a vendor can add quality-of-service, security, and voice-over-IP features to equipment it's already manufacturing. It can offer the upgrade to customers, potentially extending their products' life cycles by three to five years.

Initially, Intel Exchange Architecture will be used in high-end networking products, such as equipment found in service-provider networks and in the backbones of corporate WANs. Products based on Intel Exchange processors should ship later this year.

Intel is also interested in working with business partners to develop turnkey solutions. The company is combining Secure Sockets Layer accelerator technology acquired with the purchase of IPivot with its server products to develop a network appliance that speeds up encryption in E-commerce infrastructures. But Intel says an equipment vendor could also take IPivot's E-commerce accelerator and integrate it onto its Intel server platform, then sell it to Internet service providers as an E-commerce bundle.

A turnkey strategy could help Intel meet another goal: Leveraging its network business to drive system CPU sales. "Like Microsoft, which is always looking for new applications to drive its profit model, Intel is looking for new applications to drive churn in the Pentium market," CIMI's Nolle says.

But some observers say Intel could better promote communication among its network units to foster the development of packaged solutions. For example, with its switches, a digital subscriber line modem launched earlier this month, home networking products, and remote-access technologies, Intel is well-positioned to offer users an all-inclusive virtual private networking package that covers everything from a telecommuter's setup to the enterprise backbone. But that hasn't happened.

"Most of the contact I have with the Intel VPN group is based out of the Shiva facility," says Dan Gauthier, manager of systems engineering at pharmaceutical maker Pfizer Inc.'s clinical research group in Groton, Conn. Pfizer is deploying Intel (formerly Shiva) VPN equipment to reduce remote-access costs. "I don't think they've really gotten their cross-marketing act together yet." Pfizer supports more than 2,700 remote users who dial into the network over analog phone lines and ISDN, at a cost of about $1 million a year. Gauthier says the VPN will reduce next year's remote-access costs by $100,000.

Still, Gauthier says things have gotten better since Intel took over the struggling Shiva. Now, he says, he feels secure about the future of the technology he's using. Before the acquisition, he says, the rapid turnover at Shiva "left us with an uncomfortable feeling of how well positioned they were to keep moving forward."

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 Jesse Nemerofsky

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