Forwarding this article posted to the COMS thread:
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From Smart Money Online:
INTEL, THE NETWORKING GIANT?
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WHAT DO YOU DO if you're a $150 billion company with slowing sales for a mature product line? If you're Intel (INTC), you branch out into new markets. That's one reason behind Intel's announcements Tuesday of several new products for hooking together PCs over a network. It's hardly the chip giant's first foray into the networking business. But the scope of the new offerings -- a low-cost router and a hub for workgroups; new router switches, the devices that form the backbone of corporate data networks; and plans for a home networking product division -- have some investors wondering anew whether Intel might soon move beyond the chip business to become a major force in networking equipment.
Don't count on it. Like every other manufacturer of components, Intel has long dreamed of moving up the value chain, selling finished systems to end users, rather than just parts. But as Michael Speyer, an analyst with the Yankee Group, points out, Intel and other companies that have expanded into networking, such as Compaq Computer (CPQ), have a tough time extending their brands much beyond their core markets. The major networking concerns, such as 3Com (COMS), Cisco Systems (CSCO) and Bay Networks (BAY), are conglomerates with highly diversified product catalogs, and major sales and support staffs dedicated to networking. Not the kind of business you create overnight, in other words.
Rather, Intel has a chance to hold on to a decent, albeit tiny, sideline business in networking, and to fuel continued sales growth of its most expensive Pentium chips, in a couple of ways. For Intel, there's an obvious attraction in acquiring some extra revenue streams, however small: Sales of PCs have sagged in the past year, and new sub-$1,000 computers that incorporate chips from rivals National Semiconductor (NSM) and AMD (AMD) are raising serious questions about long-term demand for Intel's fastest Pentiums. Already, Intel's aggressive price cuts have started to show on the bottom line, with net income for the most recent quarter down to $1.7 billion from $1.9 billion a year ago.
Intel has been making modest inroads into 3Com's hold on desktop Ethernet adapter cards by reselling products from MRV Communications (MRVC), but the company must continue to keep the hubs and switches it is selling at parity with the competition. To that end, Intel also announced new modules for its switches that will incorporate Gigabit Ethernet, a technology that can move bits between computers at speeds of up to 2.5 gigabits per second. 3Com and the others, meanwhile, will continue to build more complex software into their products, combining both gigabit products and other technologies such as ATM, along with sophisticated application-specific integrated circuits to keep ahead of Intel.
What may be more valuable to Intel than creating new revenue streams is driving top-line growth for its more expensive microprocessors. Creating cheap networking products for the home, the goal of the newly announced division, is a sensible use of its good brand name that may actually increase the presence of multiple PCs, all wired together, in the nation's homes. And faster networking products may drive purchases of really powerful workstations and servers by corporate customers. Having a stable of networking products also ties in to Intel's efforts to show that PCs running its chips are easier to manage, and therefore more cost-effective for companies. Intel has continued to roll out special software that monitors the status of desktop computers.
But there's a long-term technology strategy that is important to consider, too. To drive sales of the Pentium II into the next millennium, and to jump start its next generation Merced chip, designed with Hewlett-Packard, Intel is counting on the trend toward so-called "systems on a chip" -- the slow but inevitable integration of more and more functionality that was once separate into the humble microprocessor. As chip density increases, Intel can accommodate technologies such as 3D graphics, as it recently did with the acquisition of Chips & Technologies. Eventually, chips that connect PCs to Ethernet networks may be just another feature carved in silicon. As Speyer points out, "Anything that's part of the PC looks like fair game to Intel." The result will probably be monster chips, and perhaps insane price tags, but those are products that dovetail well with Intel's shift to high-end server computers that do the heavy lifting for a company's file sharing and database processing.
We expect to see more acquisitions like the Chips buy, which give Intel the core technology to fuel this integration, and we'll take an extensive look at Intel's shopping prospects in the near future. In the meantime, with $5 billion in cash, no one is counting out the possibility that Intel may plunk down some serious money for expertise in the networking business. Likely candidates include Cabletron Systems (CS), which with a $2.5 billion market cap is one of the cheaper networking plays. Ditto for MRV. The recent agreement to manufacture a chip Intel had no hand in developing, ARM's StrongARM processor, is proof to some that Intel will stop at nothing to expand into new markets. As Ron Jeffries, a longtime networking observer, remarks, "The common reaction is to count out Intel, which is dangerous. They're huge, and they have so much cash. All they need is to buy a few more companies to get the networking expertise they need."
-- By Tiernan Ray |
