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.
Market Share
Fourth quarter 1997 market share for local area network
connectors
3Com
45%
Intel
37
Compaq
11
Hewlett-Packard
4
Others
3
Source: Dell'Oro Group
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." |
