Paul and thread:
Intel makes the cover of Business Week...well worth the read! I have to do it in 3 parts....this is Part I
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The New Intel
Craig Barrett is leading the chip giant into riskier terrain
Intel Chief Executive Craig R. Barrett sounds nearly poetic when he describes why it has been so darn hard getting the giant chipmaker to charge into new businesses--and into the Internet Age, where the old rules of computerdom no longer hold. Not surprisingly, Barrett conjures up a Western metaphor. He does, after all, live in Arizona, commuting most weeks to Intel Corp.'s Silicon Valley headquarters. Barrett compares Intel's microprocessor business to the creosote bush, a tall desert plant that drips poisonous oil, killing off all vegetation that tries to grow anywhere near it. Microprocessors so dominated the company's strategy, he says, that other businesses could not sprout around it. Chips, he says, ``are a dream business, with wonderful margins and a wonderful market position. How could anything else compete here for resources and profitability?'
How, indeed, unless you have a CEO who is kicking up a sandstorm to find a way. Nearly two years after Barrett took the reins at Intel, the chip giant is in the midst of a historic overhaul that is transforming its business and its culture--for a second time. The first, back in 1985, Intel fled the memory chip business and bet the farm on microprocessors, turning itself from a diversified maker of chips into one focused solely on producing the electronic brains of personal computers. It was a brilliant move that set up the company for a golden period of growth under legendary CEO Andrew S. Grove. But now, the days of Intel concentrating virtually all its energy and investment on PC chips are gone.
The Grove era is over. Instead, Barrett is reshaping Intel into a supplier of all sorts of semiconductors for networking gear, information appliances, and, of course, PCs. More startling, he's taking Intel into radically different terrain, such as e-commerce, consumer electronics, Internet servers, and wireless phones. ``We're putting a new image on top of the big powerful chip monster that eats the world,' Barrett says.
And how. Last September, Intel unveiled a new family of chips for the networking and communications gear that zips data traffic through the arteries of the Internet. That's a $7 billion opportunity--and it's growing 30% faster than PC processors. In the same month, Barrett launched an even wilder scheme: Internet services, a $3 billion business worldwide that is nearly doubling each year. Intel opened the first of a dozen gigantic computer centers that it's building around the world to run Web and e-commerce sites for other companies. Over the next two years, the chipmaker will spend $1 billion on this elaborate network of Internet data facilities.
WEB WAR. Barrett's handiwork didn't stop there. In October, he paid $1.6 billion to buy DSP Communications Inc., a leading maker of digital wireless phone technology. Then, in January, Intel rolled out an ambitious plan to sell branded information appliances--screen phones, e-mail stations, TV set-top boxes--through phone companies and Internet service providers. And in February, the company barged into yet another new business, announcing a family of special-purpose network servers that manage Web traffic. The boxes will go head-to-head against gear from networking powerhouse Cisco Systems Inc. and a host of smaller rivals. ``Craig stepped on the gas much more aggressively than I would have,' concedes Grove, now Intel's chairman.
Each of these new schemes is ambitious in its own right. Taken together, they're a watershed. Within five years, Barrett intends all of Intel's new thrusts to be $1 billion-plus businesses and No. 1 or No. 2 in their markets. He's betting they will help Intel grow 15% to 20% a year, up from its paltry 8% compound growth over the past two years. So far, Wall Street is buying Barrett's vision, driving Intel shares up 40% since Jan. 1--easily the best growth among the 20 most widely held stocks in the U.S. By 2001, figures Merrill Lynch & Co. analyst Joseph A. Osha, products other than processors will make up a quarter of Intel's $38 billion in revenues and contribute nearly a third of its revenue growth. ``Barrett is undertaking nothing less than a reinvention of Intel,' says analyst Drew Peck of SG Cowen Securities Corp.
But no one is sure what he'll wind up with when he's done. Intel already is late to the Internet party. And the company is trying to break into new markets that already have scores of entrenched competitors. The result: Two years into Barrett's makeover, much of the payoff for Intel remains in the future. PC components are still the heart of its business, generating 90% of revenues and 100% of profits. ``No organization its size can turn on a dime,' says Peck. ``This will be a slow, ponderous process, and meanwhile, expectations are very high.'
top networking exec who retired in 1998, ``Intel could see that the next 10 years wouldn't be as lucrative in processors.' Adds Barrett: ``It used to be that the PC was the center of the action, but now it's clearly the Internet.'
There's no question that Intel is now a Make that sky-high. Investors already are treating Barrett's plan as if success were a sure thing. That doesn't leave much margin for error. Barrett has to ensure that Intel's cash cow microprocessor business keeps throwing off beaucoup bucks to pay for the new gambits. In early March, for example, Intel will unveil the fastest PC chip ever sold, a Pentium III that runs at one gigahertz, or one billion cycles per second. But Intel's track record in its core business last year wasn't so good. The company had a rash of blunders in 1999--microprocessors and chipsets delivered months late, embarrassing design bugs, and supply shortages. Even loyal customers like Dell Computer Corp. and Gateway Inc. have taken the highly unusual step of publicly blaming the chip giant's gaffes for their recent earnings problems. Gateway was so incensed over supply problems that it's giving some orders to archrival Advanced Micro Devices Inc., which has caught up to Intel in chip performance.
That's prompting analysts to wonder if top management is prepared to handle the swirl of new initiatives. For starters, Intel is heading into territory unfamiliar to its executives--all of them veterans deeply rooted in chips. Analysts worry that the company's pell-mell rush into new businesses lacks focus. ``They're throwing spaghetti against the wall to see what sticks,' complains analyst Jonathan J. Joseph of Salomon Smith Barney. And rivals snort that Intel lacks key expertise in networking and data services--though they admit that its rich profits give it the means to buy into new markets. Barrett himself concedes that in its new endeavors, Intel will have to ``compete, scratch, and claw for market share'--a bracing change from Intel's near-monopoly in PC processors.
PC POTHOLE. Barrett had little choice. After 10 years of 30%-plus compound annual growth, Intel hit a milewide pothole in 1998. Earlier attempts to expand into new businesses such as modems and video conferencing had gone nowhere. Then falling PC prices, computer industry consolidation, and increased competition piled on top of one another, causing Intel's revenue growth to slow to 5%, while earnings declined for the first time in a decade. The bad news drove Intel's stock down 30% and kept it off its peak for most of 1998.
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