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Intel tries to find a foothold beyond PCs

Intel tries to find a foothold beyond PCs

By Quentin Hardy, The New York Times | Updated: 15 April 2013 10:10 IST

For the last several months, Andy Bryant, the chairman of Intel, has been trying to put steel in the backs of the company's employees. At meetings, he tells them that Intel must fundamentally change even though the computer chipmaker still has what it takes to succeed in engineering and manufacturing.

It is an extraordinary message at a company with the fiercely confident unofficial motto, "Only the paranoid survive." Intel now finds itself faced with a fundamental question: Can the paranoid also evolve?

Intel became the world's largest semiconductor-maker through a partnership with Microsoft that dominated the personal computer business for a quarter-century. PC sales are now collapsing, as users are relying more on mobile phones and tablets that rarely contain Intel chips.

Intel's other mainstay business, chips for computer servers, is also changing. Cloud computing is creating huge demand for basic servers, but its simpler and cheaper designs may drive prices and profit margins down and offer openings to new competitors.

Amid all the change, Intel is also scrambling to find a new leader. In November, Paul Otellini, who had been chief executive since 2005, unexpectedly announced his resignation.

"It's time to move on and transfer Intel's helm to a new generation of leadership," he said at the time, declining to elaborate on why he was leaving three years before reaching the company's retirement age of 65.

His decision left the company in limbo.

"It looks like there was no succession plan in place, and that is troubling," said Hans Mosesmann, an analyst at Raymond James. "They are probably a month away from Otellini leaving, and nothing is settled."

While the board has been looking at external candidates, the new chief will almost certainly come from within.

In contrast to Silicon Valley's culture of job-hopping, at Intel someone with 15 years' experience can be called a newcomer. The company's leaders believe that it is critical for the chief executive to be steeped in the company culture.

"The job of the board is to pick the candidate who can best grow into the job," said a person with knowledge of the search, who spoke on the condition of anonymity. "Intel has to define its next act."

In the meantime, Bryant, who has been at Intel for 32 years and served as its longtime chief financial officer, has been trying to prepare employees for a new era.

"He says that the customers have changed, and we have to as well," said a person attending one of Bryant's meetings, who was not authorized to speak publicly. "Where the revenue is now is not where the revenue is coming from in the future."

Intel declined to make Otellini, Bryant or any other officials available for an interview, citing the mandatory quiet period before its first-quarter earnings report due out on Tuesday. Those earnings, which will most likely reflect the collapsing demand for PCs, will follow the drops in revenue, operating margins and net income of 2012.

Analysts say the two top contenders to be Intel's next CEO are Brian Krzanich and David Perlmutter, who are close to Intel's core business. Krzanich, Intel's chief operating officer, oversees its fabrication facilities. Perlmutter, the chief product officer, oversees chip design.

Renee James, the head of Intel's software group, is considered a more remote chance to run what has long been a hardware company. And Stacy Smith, Intel's chief financial officer, is well liked inside and outside the company, but like Otellini, lacks an engineering background, which diminishes his prospects.

Revealing just how hard it would be for an outsider to step into the top job at Intel, the newcomer of these four joined Intel in 1988.

But close watchers of the company wonder whether its insular culture is up to the challenge of expanding to different kinds of customers and devices.

"In this new world, with smartphones and tablets, and cloud computing, things are moving around fast," said Hector Ruiz, the former chief executive of Advanced Micro Devices, Intel's top competitor in making PC chips. "Intel has the talent, engineering, and resources, but they are their own worst enemy."

Ruiz recently published a book about his efforts to sue Intel for monopolistic practices, which he said were the natural result of its paranoia. Intel paid AMD $1.25 billion to settle the case after Ruiz left the company, but Intel has consistently denied it engaged in monopolistic practices.

The idea that Intel put the squeeze on its customers has been around Silicon Valley for years, but has never been proved. With Intel controlling 80 percent of the PC market at times, and PC makers facing low profit margins, any supply interruption from Intel could be disastrous.

But any such threat may be less significant in the future.

At a meeting last week in New York, HP, a longtime buyer of Intel's server chips, showed off a server built for the cloud that ran on a low-power Intel chip, called Atom. But sharing the limelight were representatives of four other companies that will sell chips to HP for other versions of the machine.

Even Microsoft has been moving away from its longtime partner as it tries to adapt to the new, post-PC world. Last year, the software maker built its own tablet, with versions carrying chips from Intel or Nvidia, another Intel rival. Its new Xbox gaming console will use chips made by AMD. And the company's mobile version of Windows 8 is designed for smartphones that run on chips from Qualcomm.

Microsoft declined to comment on its relationship with Intel.

Intel figures its survival depends on preserving its leading position in cutting-edge semiconductors, despite the high design and manufacturing costs. Future generations of the Atom chip, which can also be used in tablets, phones and other devices, are expected to offer better performance, including a longer battery life. So will the next version of its chip for PCs, called Haswell, which will be used in products in the second half of 2013.

"I contest that this market is in decline," said Mark Bohr, a senior fellow in Intel's technology and manufacturing group. "Today's marketplace is a lot broader than 10 years ago. We have got to build for small tablets and big mainframe computers, build more flavors of each chip, and cover more bases."

Otellini has been criticized for responding slowly to the mobile challenge and cloud-based computing. His efforts have been modest, geared to learning how to listen and respond better to customers.

The company has worked with wireless phone companies outside the United States to make smartphones and tablets, which the companies then label as their own.

In its greatest departure, later this year Intel will sell a moderately priced television set-top box and subscription service, which it says will offer enough regular television content to serve as a substitute for a cable subscription.

The effort involves just 300 of Intel's 105,000 employees, most of them brought in from other companies, and has required cooperation with both Hollywood content companies and retailers. It is such a big change of direction that people following the company cannot tell if it is another effort to learn more about consumer tastes, a diversification into a whole new area or the old Intel deciding it has what it takes to face another rival, in the form of cable companies.

For at least the next few years, it must rely on making chips for servers and PCs, which can still bring the company significant amounts of cash even as its popularity wanes.

"Intel still has a lot of dough," Mosesmann said, "but their old world is cracking."

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