From Business Week: 3/2/00
Part III
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Intel Capital has scored some notable hits, including eToys, Red Hat, and Inktomi. Its holdings are now valued at more than $8.2 billion, and it kicked $327 million in pretax income into Intel's fourth-quarter results--half of the company's 6 cents upside earnings surprise. But Intel Capital wasn't conceived primarily as a moneymaker. The investment in eToys, for example, was seen simply as a way to boost the growth of e-tailing--and the purchase of PCs. ``My goal is to expose the company to every facet of the Internet economy,' says Leslie L. Vadasz, manager of the fund. ``It has already lead to an opening of minds.' The model worked so well that in 1999 Intel set up a separate $250 million fund to encourage software development for its new 64-bit Itanium processor and a similar $200 million fund to spur adoption of its new networking chips.
After the seminar series ended in 1998, the minds of Intel's managers were opened a bit more than the company could handle. At each session, attendees had broken into groups to dream up new business ideas. But ``Barrett had gotten all these people excited with nowhere to go,' says D. Craig Kinnie, director of Intel Architecture Labs, a research group in Oregon. The new CEO soon realized he needed more than just a cultural awakening: He had to change Intel's inflexible structure to allow new ideas to thrive.
WAD OF CASH. That July, Barrett came up with a solution. He and chief financial officer Andy D. Bryant threw out Intel's rulebook for funding new programs and established the New Business Group. Rather than setting tight budgets and subjecting internal startups to rigorous reviews, they were treated like venture-capital-financed companies and given a wad of cash to spend until it ran out. Under this scheme, Parker's unit has launched about 20 seed projects, each with three or four employees and a budget of several hundred thousand dollars. Seven larger projects have received $5 million to $10 million in funding. The ideas range from a scheme to equip doctors with secure IDs to encourage online medicine, to installing 3,000 information terminals on the backs of seats at Madison Square Garden for hockey fans to look up information on their favorite players. Two potential spin-offs: An Intel business called Vivonic, based in Oregon, will sell handheld computers that help users monitor their diet and fitness starting this spring. Another Portland-based venture, called PassEdge, is set to be launched this April with technology for protecting online content, such as digital music and movies, against illegal copying.
By far, Intel's biggest gamble is its nascent Web-hosting business. The idea of running Net data centers had been floated in 1996 but was shot down because top execs didn't grasp the coming rise of Web services. Two years later, in September, 1998, Barrett directed Renee James, Grove's chief technical aide, to explore the idea again. She pulled in a team of five people and spent six weeks cobbling together a plan. ``We pored over reams of data, but in the end we took a flyer,' James says. Intel's board quickly approved the plan in November, and by January, 1999, it was launched. Just nine months later, Intel opened its first data center in Santa Clara. With a capacity for 10,000 servers, the center is now barely occupied. So far, only about a dozen companies--including Citigroup, an Excite@Home shopping service, and several customers from Intel's Pandesic joint venture with SAP Corp.--are using the service.
Web services couldn't be further from the chip industry. But Intel execs argue that being in the business will give the company insight into e-commerce trends. Plus, it's an insurance policy in case computing moves to a pay-for-service model and PCs are eclipsed by devices connected to Web servers. Besides, Intel executives point out, the company already does $1 billion in online business every month. ``We run Intel.com 24 hours a day, 365 days a year,' Barrett says. ``We went from selling nothing online to more than $1 billion a month over our own infrastructure. We have expertise in this space.'
WIRELESS WAY. Still, analysts remain ambivalent about the likely success of the program. ``I just don't get it,' says Manoj Nadkarni, president of consultancy ChipInvestor.com, an investment research house based in Federal Way, Wash., that specializes in chip companies. Noting that the leading independent Web-hosting outfits, Exodus Communications Inc. and Verio Inc., are still losing money, Nadkarni and other analysts wonder what kinds of margins Intel can get from the business. Barrett won't comment on profits.
Competitors, naturally, can't resist. ``This is a mistake,' says William L. Shrader, CEO of Internet service provider PSInet Inc., pointing out that Intel is going into business against its customers. ``Intel looks like a joke. They'll retreat in less than two years as gracefully as possible.' Adds Ellen Hancock, CEO of Web-service rival Exodus Communications: ``It's a stretch for them to say they have some expertise here. We've taken years to set up our operations.'
Barrett rejects such notions but admits that Intel Online Services isn't the centerpiece of his strategy. By comparison, networking and communications are ``an order of magnitude' more important, he says, because the communications industry is larger than computing, yet Intel ``doesn't play nearly as significant a role there.' Intel, however, does stand a good chance of becoming a major supplier of wireless chip technology. The purchase of DSP Communications, combined with a joint venture with Analog Devices to develop a new digital signal processor chip, could give Intel a bigger piece of the explosive mobile-phone business. It's already the No. 1 supplier of memory chips used in cell phones. By packaging DSPC's software with Intel's energy-efficient StrongARM processor, Barrett figures he can parlay that position into selling the more profitable brains of wireless Internet-ready phones. It's a huge opportunity: Researcher International Data Corp. figures such devices could surge to 536 million units in 2003, up from 85 million in 2000. ``Wireless access is the second coming of the Internet,' says IDC researcher Iain Gillott.
But rivals aren't rolling over. The $7 billion communications chip sector is on fire, with projected 20% growth this year. Established players are beefing up their portfolios. Motorola, Conexant, and Lucent Technologies, for instance, all recently bought network processor startups, and IBM has a chip of its own. Competitors pooh-pooh Intel's prospects, arguing it lacks expertise in custom chips and analog circuits--both crucial for networking. ``Intel doesn't understand the communications market,' snaps John T. Dickson, president of Lucent Microelectronics Group, the No. 1 supplier of communications chips. What's more, says Charles Boucher of Bear, Stearns & Co., after seeing how Intel sucked the profits out of the PC makers, networking companies ``are suspicious of their intentions.'
Adding talent through acquisitions could help, but Intel's track record in promoting outsiders is poor: Only three CEOs from the 20 companies Intel has bought in the last three years are now among its top 92 executives. Most others have stayed, but they toil deeper in the ranks. By contrast, Cisco's top tier is populated with former heads of acquired companies. Intel acknowledges, too, that while its overall turnover remains an enviable 4% per year, it has had trouble holding on to younger, midlevel managers who are defecting to dot-coms. Says one former Intel exec: ``There aren't any whiz kids there.'
Barrett is undaunted. He's driving Intel at a pace it has never known before, even during the heyday of ``only-the- paranoid-survive' Grove. The new chief executive is bent on leaving a legacy every bit as large as Grove's, but he's managing a far more complex enterprise facing much greater challenges. If anything, the need to prove that Intel's success wasn't just a fluke has its managers fired up. ``We felt like we had succeeded before the Net,' says Sean Maloney, Intel's worldwide sales and marketing manager. ``Now, we have to prove it all over again.' And show the world that Intel is no creosote bush.
By Andy Reinhardt in Santa Clara, Calif., with bureau reports
Copyright 2000 The McGraw-Hill Companies, Inc. All rights reserved. Any use is subject to (1) terms and conditions of this service and (2) rules stated under ``Read This First' in the ``About Business Week' area.
3/2/00 4:05 PM |
