Can Intel have it all?
May 04, 1998, TechWeb News
Can Intel have it all? -- Microprocessor giant finds trouble
duplicating success in other markets
By Andrew Maclellan, Mark Hachman, And Mark Lapedus
Silicon Valley- With the possible exception of Microsoft, no high-tech
company is more feared in the marketplace than Intel. Its dominance in
microprocessors is unquestioned, and its expansion into new markets has
triggered waves of panic among nervous competitors.
So formidable has Intel Corp.'s reputation become that it has attracted the
scrutiny of the Federal Trade Commission, which is investigating whether the
chip manufacturer has used its clout to violate U.S. antitrust laws. And in
some sectors, there is no doubt that Intel has driven its rivals into the ground.
But in many of the markets in which the company now plays, early
predictions of an Intel rout have proved unfounded. For all the power it
wields over the CPU, the farther it moves from its core business, the more its
gravitational pull appears to weaken.
Since entering the chip set arena 10 years ago, Intel has captured 90% of the
market. Its 1997 announcement that it would make graphics ICs - and its
subsequent purchase of Chips & Technologies Inc. - had some analysts
forecasting certain victory and helped trigger the FTC's probe.
Yet, the company's motherboard business is far less robust, while its success
in flash-memory storage and networking products has been decidedly mixed.
All of which raises a question: If Intel is truly trying to take over the computer
hardware universe, just how well is it doing? As the following review shows,
for all the dread its name inspires, Intel's reach can sometimes exceed its
grasp.
Graphics and multimedia
From the reaction that greeted Intel's introduction of a graphics chip, one
might have thought Armageddon was nigh.
Press reports characterized the company as a rampaging monster bent on the
industry's destruction. Established graphics makers such as S3 Inc. were
thought to be doomed to the farthest corners of the market.
In fact, the story of Intel's multimedia efforts is largely one of failure.
In 1985, Intel developed the 82-786, a chip designed to accelerate
windowed applications in Microsoft Corp.'s DOS operating system.
Although the chip predated the Windows GUI accelerators of later years,
Intel canceled the product after sampling.
Meanwhile, Intel's arch- rival, Advanced Micro Devices Inc., developed the
Quad Pixel Display Manager, purportedly at Intel's behest.
The graphics product was designed to win AMD bargaining rights in its own
complex second-source agreement with Intel over the 386 microprocessor.
But Intel canceled the order, an act later found by an independent arbitrator
to be illegal.
In 1991, Intel took yet another swing at the market with its i750. That chip
was also scrapped once engineers discovered they could perform the same
functions with software.
In about 1992, Intel developed the "Genesis" project, a VGA controller
designed to complement the 386SL notebook processor, according to Bert
McComas, principal at InQuest Inc., Gilbert, Ariz. That project was killed for
unknown reasons, he said.
Finally, after Cirrus Logic Inc., Nvidia Corp., S3, and other graphics
companies had blazed a trail, Intel entered the market with its i740 graphics
chip. But it, too, had a false start.
The early version of the i740 "was an embarrassment," McComas said.
"Basically, Intel showed it off to developers, who said, 'That's it?' Then the
Intel guys said that no, they weren't quite finished with it and got the heck
back to the lab."
The chip is still too new for analysts to evaluate its impact on competing
products. But at the time of its February introduction, Geoff Ballew,
multimedia analyst at Dataquest Inc., San Jose, summed it up this way: "The
i740 makes a big splash, but it doesn't empty the pool."
Flash cards
As of last year, Intel was the top supplier of discrete flash-memory chips,
closing out 1997 with a 29.6% share of the market, according to Alan
Niebel, nonvolatile-memory analyst at Semico Research Corp., Phoenix.
But while it leads in the discrete- chip sector, Intel's foray into flash storage
cards has met with less success. Sales of Intel flash cards dropped by 46%
last year, to $22 million, lagging competing devices even as industry revenue
grew by more than 30%.
Of Intel's total 1997 flash-card sales, only a small percentage came from the
division's marquee product: the Miniature Card, a matchbook-size device for
storing data in handheld products such as digital cameras.
Since its release two years ago, the Miniature Card has been buried by
shipments of rival CompactFlash devices from SanDisk Corp. and Hitachi
Ltd. and by Toshiba Corp.'s SmartMedia card, analysts said.
Intel sold only a few hundred thousand Miniature Cards in 1997, but hopes
to exceed half a million units this year, said Alan Hanson, flash-card
marketing manager. By comparison, a new Semico study found SanDisk
shipped more than a million CompactFlash cards last year and captured a
28% share of the flash-card market.
Intel acknowledged that the Miniature Card has been slow to take off.
However, the company said it has been tying the format to the Pentium by
signing deals with keyboard maker Cherry Electrical Products and
card-reader manufacturer SCM Microsystems Inc.
Perhaps most important, Intel has tied the flash-card program to its digital
imaging campaign and paired Miniature Card with its 971 PC Camera Kit.
But by linking its Miniature Card and camera campaigns to the Pentium, Intel
may be limiting its market to desktop and notebook PCs, while competitors
pitch their digital cameras to the much larger consumer electronics market.
"Intel's purpose in coming out with their kit was very self-serving," said Ron
Tussy, an analyst at International Data Corp., Mountain View, Calif. "They
wanted these cameras to work behind the Pentium II on a PC."
To date, SanDisk has about a 60% market share in the digital-camera
market, which is expected to see a 37% annual growth rate, according to
Tussy. Toshiba's SmartMedia card, by contrast, occupies about 20% of the
market, while Intel brings up the rear with a 10% share.
With its manufacturing ramp looming, Intel is banking on the success of its
StrataFlash technology to double card density by fitting two bits of data in
each flash cell.
But Intel's device is currently available only in a 5-V version, while
competitors' cards have migrated to 3.3 V to keep pace with the industry's
power demands, observers said. Hanson said 3.3-V operation is now
possible by adding voltage pumps, which can add up to $2 to the cost of the
card.
Networking
In the spring of 1997, Intel rolled out a new line of Fast Ethernet-based chips
and LAN cards, along with hubs and switches for use in small offices.
The company sparked a furor by bringing out its products at much lower
prices. Wall Street promptly battered the stock of 3Com, Cisco Systems
Inc., and other LAN equipment makers. Although Intel stimulated demand
for Fast Ethernet-based products in the market, its moves cut into its own
margins as well as into its competitors', according to Scott Randall, a senior
analyst at Soundview Financial Group, Stamford, Conn.
Its pricing strategy quickly made Intel the world's second-largest maker of
LAN cards, behind 3Com. In total, the company realized about $500 million
or so in sales from its networking business. But those numbers don't tell the
entire story, Randall said.
"Frankly, I think they are struggling a little bit in networking," he said. "It's not
one of their most profitable units. . . . If Intel is making money, it's not by
much."
Nevertheless, Intel pressed on last week, entering the 1-Gbit Ethernet market
with a line of chips, modules, and switches. Later this year, the company
plans to join the home networking market with a new line of products, said
Dan Sweeny, business manager at Intel's newly formed Home Networking
Operation, based in Hillsboro, Ore.
Motherboards
In the mid-1990s, Intel began selling PC motherboards, claiming the business
would propel sales of its then-new Pentium chips. It set a target of 20 million
boards per year by 1996.
The decision angered Taiwan's board makers, which controlled more than
80% of the merchant motherboard market. Fortunately for Taiwan, Intel
quickly found itself losing money in the low-margin business and scaled back
its efforts.
Even so, Intel shipped 7.3 million motherboards last year, giving it a 10%
market share, according to the government-sponsored Market Intelligence
Center in Taipei. Meanwhile, Taiwan shipped 43.5 million boards, giving it a
59.7% share.
"It's difficult to say who's taking market share away from whom," said one
analyst in Taiwan.
Chip sets
One area where Intel has clearly become the dominant player is chip sets.
Less than a decade ago, Intel's 386 and 486 microprocessors were
complemented by a host of low-cost third-party chip set suppliers: Chips &
Technologies, Opti Inc., VIA Technologies Inc., VLSI Technology Inc., and
others.
At the time, Intel itself privately labeled and resold 16-bit chip sets made by
now-defunct ZyMOS Corp. But when it began developing the Pentium chip,
Intel feared chip set manufacturers could not produce a complementary
product in time.
"Intel felt at that time that the other chip set suppliers weren't doing enough to
advance the PC platform, so they stepped in to build their own products,"
said Linley Gwennap, microprocessor analyst at MicroDesign Resources
Inc., Sunnyvale, Calif.
In 1995, Intel introduced the Triton, a chip set designed for the 3.3-V
Pentium microprocessor. Triton featured interfaces to EDO memory, the PCI
bus, plus IDE hard drives and peripherals - but did not assure compatibility
with non-Intel microprocessors such as AMD's K5 and Cyrix Corp.'s M1.
"My general impression at the time was that there was total confusion in that
market," said Dean Hays, vice president of marketing at VIA Technologies,
Fremont, Calif. "Intel's thinking was that there were these idiots out there that
were going to limit their grandiose ideas."
Faced with Intel's superior design expertise, the competition for chip sets
dwindled to three "major" players: Acer Labs Inc., Silicon Integrated Systems
Inc., and VIA. At the same time, Intel's estimated chip set market share
rocketed upwards from 22% in 1995, to 56% in 1996, to an estimated 90%
in 1997.
With the introduction of the Pentium Pro, Intel began warning competitors
that it regarded the complementary chip sets as its own technology.
But while those suppliers consider that position unfair, Intel will license the
technology in exchange for "fair value," a company spokesman said.
Still, Intel's new 440BX chip set costs $52 in 1,000-unit lots, without the
threat of a competitive product.
"Antitrust laws forbid Intel from forcing its customers to buy an Intel chip set
in order to get an Intel processor," Gwennap wrote in a recent edition of his
firm's newsletter, The Microprocessor Report. "But by eliminating all other
options, the company has achieved the same result."
Copyright (c) 1998 CMP Media Inc.
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