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9/20/2009
06:02 PM
Alexander Wolfe
Alexander Wolfe
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Wolfe's Den: Why Intel's Reorg Puts Maloney In CEO Successor Seat

How Intel's painful efforts to diversify beyond computer processors have dogged president Paul Otellini, and why they'll challenge Sean Maloney, the man viewed as next in line to lead the company following a management shakeup.



The conventional wisdom, following a shakeup of its senior management, is that Intel chief sales and marketing officer Sean Maloney is now established as the future successor to CEO Paul Otellini. But wait; Otellini, who deserves kudos for a steady leadership style that's positioned the chip behemoth for the future without creating a cult of personality, isn't going anywhere just yet.

The September 14 reorg saw Intel's operating structure realigned on two main fronts. In design and development, all the major product groups were consolidated into the newly formed Intel Architecture Group, which will be run by Sean Maloney and Dadi Perlmutter, a well-regarded Israeli-born engineer who heretofore led the Mobility Group responsible for the creation of Intel's Atom netbook processor.

Simultaneously, Intel put all its manufacturing operations under Andy Bryant, who currently holds the title of chief administrative officer. To long-time Intel watchers, Bryant is better known as Intel's chief financial officer from 1994 through 2007. Overseeing Intel's fabs is a natural fit for Bryant, as I'll discuss later.

Along with the elevations, Intel bid farewell to two executives. As the press release worded it, chief technology officer Pat Gelsinger and general counsel Bruce Sewell were leaving "to pursue other opportunities." Both promptly reemerged, adding veracity to Intel's claim that the major realignment had been in the planning stages for months (i.e., these guys had plenty of time to find new jobs). On Sept. 14, Gelsinger landed as president of the storage infrastructure business at EMC, and the next day Apple announced it had tapped Sewell to be its top lawyer.

Intel's moves kicked off a typical Web news cycle of "type now, think later" coverage, depressing for its conventionality. Much of it keyed off of verbiage in the announcement that Otellini "will devote a higher quotient of his time to corporate strategy and driving the company's growth initiatives" to drive the story line that Maloney was moving into position as a CEO in waiting.

Conventional though that thinking may be, my sources close to Intel tell me that, inside the company, if you're a betting person, you're betting on Maloney as well. At the same time, no one believes Otellini is being shoved toward the door, or that that strategic focus mentioned in the memo is a euphemism for being kicked upstairs. Indeed, with the emerging business challenges in EMEA, there's a lot of strategy to scope out.

There are other reasons for the view that Otellini will remain at the helm. For one, Intel does not change CEOs rashly, and would certainly seem disinclined to ditch one who's successfully navigated his way through several tech down cycles. At 58, he is seven years from Intel's mandatory retirement age for CEOs. (I've confirmed it's 65; I point this out because there are several stories searchable on Google which give the age as 60.)

Plus, despite lacking charisma, Otellini exhibits a certain leadership poise, polished by his four years as the public face of the company, that can't yet be matched by either Maloney or Perlmutter.



On the other hand, there's a feeling that, if Otellini got hit by a bus tomorrow, Maloney would not get the nod, because Bryant is more seasoned. Before joining Intel in 1981, Bryant was much admired by Lee Iacocca, who brought him over to Chrysler from Ford. Rising through the ranks at Intel, he was the company's interface with Wall Street for a decade and a half, astutely managing Intel's financials.

Here's how I characterized Bryant's financial leadership back in February, when Intel doubled down amid the recession, pledging to spend $7 billion over the next two years to upgrade a bunch of its chip plants to next-generation, 32-nm fabrication technology:

"Over the years, I've been impressed with the way Intel manages the massive capital flows involved in funding the construction and operation of chip fabs. If you've ever heard presentations from Andy Bryant, formerly Intel's chief financial officer and now its chief administration officer, you know it has engineered its cash flow as expertly as it does its chips.

Intel has a waterfall model where a few cutting-edge plants crank out the fanciest (and most profitable) processors. When plants age and become not quite so state-of-the-art, they move over to cranking out mainstream product, and so on down the chain. It's a factory flow model Henry Ford would've been proud of."

However, when if you look at succession a few years out, the equation changes, because Bryant is 59 and Maloney is only 53. That's not ageism, but the reality that Bryant doesn't have as much runway ahead of him before Intel's mandatory CEO retirement age.

Maloney's real chops -- and the reason he's the odds-on favorite as Otellini's successor -- come from his combination of sales experience coupled with a technical background. In this regard, he would bring a more balanced perspective to the top job than any of his predecessors. (Robert Noyce, Gordon Moore, Andy Grove, and Craig Barrett were engineering types; Otellini is an MBA.)

Maloney started out doing programming, moved into marketing, progressed into a Silicon Valley version of a Supreme Court clerkship -- he was a special assistant to Grove for three years -- and then became head of Intel's Communications Group (ICG).

Maloney was head of ICG in 2006 when Intel sold its communication processor business to Marvell Technology Group Ltd. for $600 million. I consider the sale a watershed event, and not in a positive sense, because it pulled the rug out from under what might eventually have emerged as Intel's first big success in diversifying away from its singular reliance on PC processors.

ICG made Intel's XScale devices, which were a family of communications and applications processors -- such as the PA9XX series -- which appeared in a variety of mobile phones, most notably a good number of Blackberrys. Though it's recently been edged out somewhat by Freescale on the Blackberry front, Marvell is still a legit player in the mobile arena.

At the time Intel exited the business, XScale chips played variously in both the applications-processing, or baseband end of the equation, as well as in the communications-processing end. (Baseband means the non-radio-frequency stuff; i.e., all the regular processing functions to run the phone which don't involve communicating with the cell phone towers. So-called comm processors handle the CDMA and GSM stuff.)

Subsequent to Intel's departure, Marvell has advanced the technology ahead into integrated chips handling both the apps and comm end, fielding devices such as Marvell's PXA90x cellular processor.

My point here is, I believe if Intel had not bailed on its communications business in the face of Wall Street's numbers tyranny, and had stuck with XScale, it would have a sustained smartphone presence today. Indeed, the argument that, well, Intel simply had to sell the XScale business if it wasn't performing, falls completely apart when one observes that, subsequent to the sale, Intel has groped around for another diversification play.

Fortunately for Intel, it seems to have stumbled upon that play in the form of Atom netbook processor. The only rub here is that Atom is nowhere near as pure a diversification play as are comm chips. That's because, in creating an entirely new category of down-sized laptops -- which is what netbooks in effect are -- Intel is setting itself up to cannibalize its sales of higher-priced mobile (i.e., laptop) processors.

Now, Intel has done a wonderful job of mitigating potential problems. It has used its killer manufacturing capability -- props here to Bryant -- to keep Atom's yield up. This means it can extract many working processors from a single large silicon wafer (hundreds of chips are etched simultaneously on a 12-inch round die). This in turn means that, even though Atoms aren't expensive, Intel can still make money on them. Atoms aren't available to consumers, but rough estimates are that they sell to OEMs for around $30 and cost Intel around $8 to make.

One has to wonder, though, how much longer it'll be before netbooks shunt aside lower-end laptops entirely. I posed the question about whether Atom is stealing sales away from laptop processors, earlier this year to Stephen Smith, VP of Intel's Digital Enterprise Group. His answer:

"Adoption has been faster than our original forecasts and we actually had to react to put in place more assembly and test capacity to get them out the door. Netbooks have moved very quickly. It really hasn't had any impact on our traditional notebook business. We see it as a new category and a new line of business for us."

Despite such seeming confidence, one can infer that Intel has at least some fear of category overlap, and hence laptop cannibalization, when one looks at the length to which the company has gone to jump-start the entirely new category of mobile Internet devices. MIDs are the inelegant name Intel has coined for what amount to handheld Web browsers which are bigger than a smartphone but smaller than a tablet.

While there are some cool MIDs which have been fielded -- such as the HTC Shift -- the category was conceived before Apple let drop that it's going to be launching a Mac tablet. It's almost impossible to imagine that that latter "iPhone on steroids" won't become the canonical handheld browser, which will consign all other MIDs to a Zune-like fate.

Deep Bench

Interestingly enough, Atom is associated with the dark horse of the three executives considered contenders for Otellini's slot. That would be Perlmutter, about whom I've said little. (His Intel bio is here.) Perlmutter is considered to be both highly competent technically, and a competent technology executive. However, technology is both his strength and his weakness, in that he probably hasn't done enough on the sales and marketing side to pose a serious challenge to Maloney's chances.



Nevertheless it would be foolish to count Perlmutter out, because if he doesn't grab the brass ring at Intel, he could easily follow the path of a number of his colleagues to another executive suite. Indeed, Intel has demonstrated that it has a deep bench of tech executives, of which other companies are only too happy to avail themselves.

Pat Gelsinger, who many are now touting as a potential successor to EMC chairman Joe Tucci, is only the latest to be snapped up. There are other recent cases in point. There's Abhi Talwalkar, the one-time co-head of Intel's Digital Enterprise Group (with Gelsinger, no less), who in 2005 succeeded Wilf Corrigan and president and CEO of LSI Logic. Dave House was an up-and-comer at Intel, before he left in 1996 to run Bay Networks. House subsequently became president of Nortel Networks and is currently chairman of Brocade Communications Systems. And executive vice president Mike Fister, who ran the Enterprise Platforms Group, was tapped in 2004 to run electronic-design automation (aka complex chip-design software) powerhouse Cadence Design Systems.

Such a deep bench dovetails with my sense that there's far more synergy amongst Intel's top management team than there is at comparably sized competitors. Certainly, Intel's leadership presents a less autocratic face than, say, Cisco, Oracle, or IBM.

Thus, the fact that talented individuals such as Maloney, Bryant, and Perlmutter have, in effect, been developed by Intel's executive farm system is no surprise.

Tall Order

Whomever is selected when Intel decides to make its next executive transition will have a tall order. It's interesting to note that both Otellini and his predecessor Craig Barrett had their share of grief. Barrett was buffeted by problems with Itanium, an architecture which was initially positioned as the wave of the future. Inside, it ended up as a low-volume play for high-end servers.

Barrett's reign also saw single-core technology max out, as power dissipations rose with increasing clock speeds. (At the end of the single-core era, chips were threatening to hit 150W.) That issue was left for Otellini to deal with. After taking over in 2005 he famously embarked on a technological "left-hand turn," which saw Intel lead the industry toward multi-core processing.

Otellini achievements also include riding out two downturns. Intel had its biggest layoffs ever in 2006. During the current recession, Intel has held its own. On the technology front, along with the Atom, he's led a push towards more flexible architectures. These include the Larabee graphics chip, the 80-core programmable Tera chip (a demonstration project), and the System-on-Chip (SoC) effort.

SoCs are the most flexible of all, enabling intellectual property (i.e., IP is processor designs which on paper) to be configured into many different, purpose-built processor. Thus, SoCs could be the ultimate diversification play. The other problem is that, heretofore, IP-based SoCs have been the province of companies which didn't have enough money to fabricate their own chips. That's a round-about way of saying that, the more specialized a design is, the less of a volume business it constitutes. And Intel is nothing if not a high-volume powerhouse.

How much further Otellini will be able to adjudicate the tough mix of standard processors, Atom, SoCs, and future initiatives remains to be seen. But one must give him credit for putting Intel on a path toward a more diverse mix of technologies. Yet Maloney, or whomever is anointed successor, will clearly have his work cut out for him.

Here's my video interview Maloney, from this past April:


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Alex Wolfe is editor-in-chief of InformationWeek.com.

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