Thread: WSJ article on Ontel, Bay and others.
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February 24, 1998
Intel Moves Into Networking
With a Series of New Devices
By DEAN TAKAHASHI
Staff Reporter of THE WALL STREET JOURNAL
Not satisfied with selling the brain for nearly every personal computer, Intel Corp. wants a bigger role in hooking them together.
The Santa Clara, Calif., company Tuesday is unveiling a series of computer-networking devices that move Intel into one of the most lucrative segments of high technology. And by getting deeper into corporations' communications plumbing, the company -- which has annual sales of $25 billion -- is blurring the lines that now divide major partners, customers and competitors.
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Market Share
Fourth quarter 1997 market share for local area network connectors
3Com ÿÿÿÿÿÿÿÿÿÿ45%
Intel ÿÿÿÿÿÿÿÿÿÿ37
Compaq ÿÿÿÿÿÿÿÿÿÿ11
Hewlett-Packard ÿÿÿÿÿÿÿÿÿÿÿÿ4
Others ÿÿÿÿÿÿÿÿÿÿÿÿ3
Source: Dell'Oro Group
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It won't immediately threaten the market's leaders, such as Cisco Systems Inc. But Intel will increasingly compete with chip customers that have networking sidelines, such as Compaq Computer Corp. and Hewlett-Packard Co., and is likely to drive down hardware prices.
"Intel's impact is going to be felt in the form of price pressures that will hurt the margins of the bigger companies," predicted Brendan Hannigan, an analyst at Forrester Research in Cambridge, Mass.
Small-Business Focus
Intel officials say their moves are measured, with particular emphasis on consumer and small-business markets that the big companies have ignored. While established networking companies dismiss it as a bottom feeder, Intel believes that its role will inexorably expand because of its central role in the evolution of PC technology, which gives it an inside position in improving the way those machines communicate. It may not become No. 1, but No. 3 or No. 4 would do nicely.
"We're not going to be Cisco," said Craig Barrett, president of Intel, in reference to the networking giant. "The big guys in networking can still laugh at us. But we're going to grow at faster rates than them."
Intel's progress in the low end of the market is instructive. Several years ago, it began using its manufacturing muscle to make low-cost chips for network interface cards, which plug into a computer and allow it to communicate using standard communications schemes such as Ethernet. Later, Intel began making the cards themselves, opening up a major battle that has driven down prices for one-time customer 3Com Corp. in Santa Clara, Calif. In the most recent quarter, Intel had clawed its way to No. 2, with only about eight percentage points of market share separating it from 3Com, according to the Dell'Oro Group in Portola Valley, Calif.
Recent Acquisitions
Intel more recently edged into other kinds of networking hardware, including the hubs, switches and routers that funnel data among computers inside buildings and to the Internet. In the past year, Intel invested nearly $150 million in acquisitions of Case Technology Ltd. and Dayna Communications Inc. and a minority stake in Xircom Inc. Those moves brought it into competition with Bay Networks Inc., another Santa Clara company that is a big maker of switching equipment and, coincidentally, is led by former Intel executive David House.
The acquisitions were "a change in behavior for us, a sign that we wanted to grow other significant businesses," said Frank Gill, executive vice president in charge of the network business.
Mr. Gill estimates that Intel's annual revenue from networking is roughly $500 million, up 40% in the past year. The products being announced Tuesday take the company into several other parts of the market, including switching devices for medium-size businesses, so-called "gigabit" Ethernet switches used for high-performance jobs at large enterprises, and home network products, said Mark Christensen, an Intel vice president.
Once again, Intel hopes to use chip expertise to lower prices and raise performance. It made big waves a year ago when it slashed prices 40% on chips for medium-speed networking cards known as 10/100 Fast Ethernet. Mr. Barrett said Intel will use similar cost-cutting tactics in gigabit Ethernet products, which transfer data about 100 times faster than traditional networks.
Shortly, Intel plans to launch a customer-service phone network to help small businesses deploy and maintain networks. Eventually, the company, which usually gets $100 to $500 per PC for its microprocessor chips, could get as much as $150 in additional revenue from each PC hooked to networks, Mr. Christensen estimates.
'Bang-Up Job'
"Intel has done a bang-up job in the network interface market," said Tam Dell'Oro, president of the Dell'Oro Group. "They're moving to a new level along with a lot of other players who see that the networking market is in a great deal of flux."
But competitors see land mines in Intel's path. The chip maker, for one thing, has relatively little experience in the software used to control routers and other sophisticated network gear. Intel also lacks the direct sales and consulting staffs of specialists such as Cisco, where sales are running at an annual rate of about $8 billion.
"They are a player in the low-cost part of networking, while we are focused on the value-added software," said Charles Giancarlo, Cisco's vice president for global alliances. "Our major distinguishing factor is our large direct sales force."
Intel's business in networking chips also could suffer, rivals contend, if it keeps competing with the companies that buy those chips. "If you work with Intel, you don't know if you are a customer or a competitor," said Edward Rodriguez, vice president of the LAN Division at chip maker National Semiconductor Corp. in Santa Clara. "With us, the customers know they can work with us on joint engineering without worrying about it."
Large competitors say Intel's manufacturing might doesn't scare them. Rakefet Kasdin, a 3Com vice president, insists that Intel's low-priced network cards only took market share from smaller companies. More broadly, rivals question Intel's focus on portions of the networking market that can't keep up with the profitability of Intel's Pentium chip lines.
"When I get up in the morning and go to bed at night, I think about networks," said Lloyd Carney, a Bay Networks executive vice president. "I don't think about selling Pentium IIs."
Intel thinks it can outflank rivals in an emerging home market for computer networks, attacking the growing number of homes that have two or more PCs. Though about 400,000 homes have networks already, Mr. Gill says, most don't because of the hassles of stringing cable from one room to another. Intel is expected to offer products that communicate through wireless links or home electrical wiring.
With such devices, a family could view a CD-ROM on the television, or play networked games against each other. Eventually, Intel hopes that a PC will serve as the central control device that manages entertainment devices, kitchen appliances, lights and security systems.
Then there is the better-defined market for small businesses, many of which can't afford to keep a network administrator. In addition to the forthcoming phone service for such customers, Intel last month announced a line of low-end hubs and routers that make the company more credible in the field.
"The home market is overrated now," said John Armstrong, an analyst at Dataquest Inc. in San Jose, Calif. "But small business isn't."
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Victor
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