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Intel Faces Challenges After Surprisingly Tough 2000
By May Wong   Associated Press
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SANTA CLARA, Calif. — Over more than three decades, Intel Corp. has built an empire by making the microprocessors that run the vast majority of the world's computers.

Though the "Intel Inside" brand remains dominant, it is no longer a given today. Computer makers are less likely to care who makes the brains for their devices, as long as reliability and low cost can be assured.

A string of Intel glitches and missteps — including two recalls, a product cancellation and several product delays — allowed rivals to make key gains last year. Such problems are fairly routine for tech companies, but the frequency and scope at Intel made rival chips more appealing.

"Intel has enjoyed a couple of really great years, but the tide is turning," said Dan Scovel, an analyst with Needham & Co. Inc. "Competitive pressure is increasing."

Intel is now branching out into business services and consumer products in an effort to generate new revenue in the face of a saturated personal computer market. But in straying from its core chip-making mission, some analysts think Intel could lose the reputation for reliability that always gave it an edge.

For the first time, the $34 billion company could be in danger of allowing its rivals to get a solid foothold in the corporate PC chip market, where the lion's share of all desktop processors are sold.

Intel executives say they've made changes to correct their execution problems, and are shrugging off the skeptics.

"If we were a single-product company and something happens to our one product, then it's a disaster. Then if we start to diversify, then people write you were a great single-product company but now you're spreading yourself too thin," chief executive Craig Barrett said at Intel's developers' forum last week. "I'm not sure what we're supposed to do to not get criticized in the press."

Intel conquered the PC world through key alliances with Microsoft Corp. and other major players, and its commitment to advance chip technologies. The company commands more than 82 percent of the world's $25 billion PC chip market and held onto its overall share last year, according to Mercury Research.

But more customers are widening their doors to Advanced Micro Devices Inc., whose high-end Athlon chips helped it increase market share from 13.6 percent to 16.7 percent last year, said Mercury Research analyst Mike Feibus.

Cyrix Corp. and newcomer Transmeta Corp. carry most of the remaining 1 percent. AMD's gains — jumping from $250 million to $1 billion in quarterly revenues last year — were taken mainly from Cyrix, analysts say.

AMD also is aiming at Intel customers.

Gateway Inc., Compaq Computer Corp., Sony Corp. and other companies that previously only carried Intel chips have started in the past two years to incorporate non-Intel chips into some consumer products.

Intel is still considered a top-notch company; analysts are only questioning its approach to holding onto its strength, particularly as the slump in personal computer sales makes it difficult to satisfy investors accustomed to Intel's 10 percent to 20 percent annual growth.

The industry outlook for 2001 is so bleak that some Wall Street analysts are projecting Intel could even see a drop in revenue, breaking its string of 14 consecutive years of annual growth.

With uncertainties in the near-term outlook, Intel projects that its first-quarter revenue could decline 15 percent from the preceding quarter.

Last week, it delayed raises, slashed discretionary spending and cut back on hiring. The company said it hopes for an industry recovery later in the year, aided in part by increased production of the Pentium 4 and Intel's new low-powered processors for laptops.

Barrett said Intel will spend more during the slowdown in an effort to maintain a 15 percent annual growth rate. Planned investments include $7.5 billion — up 12 percent from the previous year — to build plants with more advanced and ultimately cheaper chip-making processes.

They also plan to keep diversifying. In the last two years, Intel has delved into consumer devices. It now trails only Logitech in the PC camera market, and is investing in increasingly popular MP3 players and wireless home networking kits. It has also spent more than $7 billion to acquire more than 20 Web-hosting, network and communications infrastructure businesses.

The diversification strategy has won some praise.

"Clearly the PC market is maturing and the growth rate and profitability is falling," said Linley Gwennap, principal analyst for the Linley Group. "For Intel to sustain their growth rate, they have to get outside of that market."

But Intel's approach also has prompted criticism, including a call from a veteran industry analyst, Rob Enderle of Giga Information Group, for Barrett to step down. Enderle says the company should remain focused on the demand for PCs, which is still increasing, although at a slower rate.

"Intel appears to be diversifying at an unprecedented rate into businesses that cannot make up for the loss in PC revenues," Enderle wrote. "And this diversification is currently fueling the growing, and mistaken, belief that the PC is no longer relevant."

Though the Santa Clara, Calif.-based company has nearly $14 billion in cash, Enderle isn't alone in worrying that Intel is spreading itself too thin.

"If there's a method to their madness, it's not clear from the outside," S.G. Cowen analyst Drew Peck said of Intel's new ventures. "They're walking an unbelievably tight rope here, and that's the problem I think Barrett has."

Nearly everyone agrees: Intel must execute well on all fronts.

For years, AMD had difficulty delivering reliable chips on a timely basis. But last year, AMD won one design award after another, while Intel's reputation faltered as a result of its product delays and recalls.

"Intel left a hole big enough for a truck to drive through and AMD drove through it," Gwennap said.

Shipments of desktops using the Athlon chip in the United States tripled in a year, increasing its market share from 4.8 percent in December 1999 to 15.4 percent by December 2000, according to PC Data. Feibus thinks AMD's market share will increase even more this year.

And some analysts say Athlon chips outperform Intel's Pentium IIIs, while AMD's new value-end Duron chip offerings look to be putting up a good fight against Intel's aging Celeron line.

"Our view is not that AMD took advantage of Intel's stumbles, but in some way, Intel stumbled because they had to respond to competition," said AMD spokesman John Greenagel.

A December survey of corporate technical officers by Giga showed declining loyalty to the Intel brand. Unlike previous years, some corporate buyers no longer categorically reject lower-priced or equal-performing chips just to have Intel chips inside their machines.

While none of the major computer makers have handed AMD their big corporate product lines, analysts say it may just be a matter of time because some AMD chips are performing just as well as Intel's, and for the moment can be made more cheaply.

"One by one, we've seen corporate buyers move to AMD," Peck said. "I doubt Dell (the only major vendor that still deals with Intel exclusively) can hold off on AMD much longer."

Compaq, the world's leading PC maker, "agonized" in 1998 before becoming the first large brand-name computer maker to introduce AMD chips in consumer desktops, said Leslie Adams, Compaq's vice president of consumer product marketing.

"We learned that as long as you could deliver good value, that consumers really don't care — much to Intel's chagrin, of course," Adams said. "And AMD has done very well," she said, citing improvements in quality and its aggressive marketing.

"Our philosophy is that if there's a vendor that can provide a solution that can meet the needs of the segment of customers we're talking to, we'll use it," said Mark Hanson, Sony's vice president of PC products.

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