Intel plans to spread its chips everywhere

By CHRIS BARTON

Chip giant Intel's digestive juices are working overtime with its $US7.2 billion ($NZ14.4 billion) worth of acquisitions in the past 15 months and its plans to spend $5 billion this year on new manufacturing plants and internet hosting data centres.

The aggressive plans reflect the company's changed mission statement. It no longer aims to be No 1 in the supply of silicon "building blocks" for the PC industry.

The titan of semiconductors, with 1999 revenues of $29.4 billion and net income of $8.1 billion, now intends to be "the pre-eminent building block supplier to the global internet economy."

In short, Intel wants its silicon not just in PCs but everywhere - in internet communications and networking devices, new internet appliances, servers, and even mobile phones.

Chairman Andy Grove argues there is no need to overly "romanticise" the change of strategy. It's just that the internet does indeed change everything.

"The internet is the principal driving force for network computing and that mandates our participation in networks and servers. The computing is still done by silicon technology."

But the speed of the change - despite Mr Grove's own advice that businesses today must be ever vigilant for "strategic inflexion points" that can turn dominant market players into yesterday's companies - has clearly caught Intel on the back foot.

Hence the flurry of acquisitions to play catch up - particularly in the communications, networking and cellphone sectors.

Mr Grove says it's the first time in the company's 32-year history that it has resorted to a strategy of growth by acquisition. But at least it gives the author of the catch-cry "Only the paranoid survive" something to worry about.

"I'm paranoid about time. We've undertaken a difficult task in getting into lots of new areas at a very rapid rate.

"When you drive faster than a prudent pace, you screw up. Then you divert income and more resources into fixing the screw-ups and it slows you down."

Not that Intel is a stranger to change of this magnitude. In the early 80s the company reinvented itself from a memory manufacturer into a microprocessor-only shop.

So does Intel's reinvention signal the demise of the PC?

Intel executives are quick to point out that with 20 per cent growth last year, the PC industry is far from dead. But it's worth noting that most growth is coming from PC servers (33 per cent) and high-level PC workstations (26 per cent) rather than desktop PCs.

Intel says the low-cost PC trend of the past two years is here to stay. That means less milking of the never-ending PC upgrade cycle - where Intel produces and controls the supply of more powerful and faster chips, and customers wanting the latest software have little choice but to "refresh" their hardware.

Intel says 90 per cent of the world's homes still exist without a PC, compared with TVs that feature in 77 per cent of homes and phones that are in 45 per cent. Its response to this PC-deprived world is to announce a low-cost "web appliance."

Rather than compete directly in the "value PC" sector governed by cut-throat margins, Intel plans to push the Celeron processor PC with built-in phone to internet service providers and telcos, which will sell rentals to consumers in much the same way as mobile phones are sold. The strategy means Intel can enjoy an ongoing revenue stream.

But the most surprising differentiation of the appliance is it's a Windows-free zone. Intel software engineers have used the "open source" Linux operating system and Netscape's Mosaic web browser to design the software user interface.

That Intel would go to so much trouble on the yet-to-be-named Intel-branded appliance, which makes its debut in Europe in June, is symptomatic of a fundamental problem with PCs - that they're frequently hard to use.

If the PC is to survive, Intel knows it must change them from big, beige and boring by giving them speed, simplicity and style.

Its software engineers have developed an "instant on" code that has been licensed to Microsoft and will start a PC in seconds rather than minutes. Intel is also active in developing small "form factor" motherboards so PCs can come in sleek shapes and sizes.

To many PC users, the question will be, "What took you so long?"

The answer probably has something to do with the rapacious profits made possible through regular PC upgrades.

In the early stages of the PC evolution, users were prepared to put up with its foibles because the benefits - especially for business users - were considerable.

"I liken it to a junk truck. Over the years it's added new things but never got rid of anything, " said the vice-president of Intel's desktop products group, Pat Gelsinger.

That's about to change as Intel promotes an "out with the old and in with the new" strategy to remove legacy technologies such as the floppy disk, poor-resolution screens and low-speed expansion architecture.

Even with the changes, which are about to usher in a range of wacky designs, the PC still lags in delivering person-to-person communication.

After five years of ethnography research (a combination of behavioural and market research), Intel has found that "people want to spend time together and feel connected."

The Intel Architecture labs vice-president, Craig Kinnie, says the difficulty with the PC is in hiding the complexity of communications. "It takes a long time to make it so simple that average people can do it."

One device that isn't having problems hiding communication complexity is the cellphone, which has rapidly overhauled the PC.

In 1999, 275 million mobile phones were sold compared to only 113 million PCs. By the end of this year there will be 450 million mobile phone subscribers. By 2003 they will number one billion.

The vice-president of Intel's cellular communications division, Hans Geyer, is predicting that in the next few years there will be more people connecting to the net via a cellphone than by PC.

Intel aims to dominate the "cellular silicon" sector - estimated to be worth $23 billion in 2003 - in the same way as it has dominated PC chips.

It already supplies flash memory to 55 per cent of the phones sold, and through its acquisition of DSP Communications for $1.6 billion in November it now supplies silicon for the digital signal processors that make data and voice fly.

But it wants more - hoping to attack the cellphone microprocessor market as well with its Strong Arm chip. Intel picked up the licence for this processor when it acquired Digital's semiconductor business four years ago.

So can we expect the "Intel Inside" logo to start appearing on cellphones any time soon? "No" says Mr Geyer. "The phones are too small."

* Chris Barton visited Intel's offices in Santa Clara and Portland as a guest of Intel.