Intel Corp - Attempted Shift From Microprocessors To Networking And Internet Technology

ATTEMPTED SHIFT FROM MICROPROCESSORS TO NETWORKING AND INTERNET TECHNOLOGY

According to a March 2000 article in Business Week, "After 10 years of 30 percent-plus compound annual growth, Intel hit a milewide pothole in 1998. Earlier attempts to expand into new businesses such as modems and video conferencing had gone nowhere. Then falling PC prices, computer industry consolidation, and increased competition piled on top of one another, causing Intel's revenue growth to slow to 5 percent, while earnings declined for the first time in a decade." A major blow to Intel had come in February of 1997, when Compaq Computer Corp. released a PC powered with a Cyrix Corp. microprocessor for less than $1000. Soon thereafter, other PC manufacturers began manufacturing their own lines of inexpensive PCs, leaving room for rivals like Cyrix and Advanced Micro Devices (AMD) to market their less expensive microprocessors.

Eventually, Intel decided to develop its own series of microprocessors for inexpensive PCs. Intel named the line Celeron. Chips for more costly servers and workstations were grouped together under the name Xeon. The firm also realized that it could no longer rely on the PC industry as its sole source of profits. As a result, it began diversifying beyond central processing units into things like flash memory chips—those used in digital cameras, handheld computers, and cell phones—and other networking and communications devices. In January of 1999, Intel began offering Internet services such as Web hosting.

A multi-billion dollar acquisition spree included the purchase of Dialogic Corp., IPivot Inc., and Parity Software Development Corp. The firm also paid $1.6 billion for wireless technology maker DSP Communications Inc. and $2.2 billion for broadband device chipmaker Level One Communications Inc. That year, Intel released a series of chips for networking and communications devices that help to power the Internet. At the time, the market for such devices was growing roughly 30 percent faster than the PC market. In an effort to gain access to emerging technology, Intel began investing in upstart software and Internet firms. By 2000, the company's Intel Capital arm had poured roughly $1.2 billion into ventures such as eToys and Inktomi.

Along with efforts to diversify, Intel also continued developing faster microprocessors, such as the Pentium III, a 1 gigahertz (GHz) processor introduced in early 2000. Rival AMD unseated Intel as the maker of the world's fastest chip with its less expensive 1.2 GHz Athlon processor, unveiled in February of that year. Intel's efforts to regain its title with a slightly faster chip failed when the firm was forced to recall that chip in August. However, in November Intel released the Pentium IV, a 1.5 GHz chip.

Growth via acquisition continued as the firm paid $1.25 billion for Denmark-based GIGA A/S and $450 million for Basis Communications Corp. Intel also bought computer telephony solutions provider Picazo Communications Inc. In addition, the firm announced its intent to begin selling appliances such as set-top boxes for televisions via Internet Service Providers (ISPs), screened telephones via telephone companies, and network servers for Web applications.

Despite Intel's bold plans to reinvent itself as a networking and communications technology provider, in 2001 revenues declined for the first time in approximately 10 years. One reason for the lower revenues was a price war initiated by Intel. In September, in an effort to wrest lost market share back from rival AMD, Intel unveiled its 2 GHz Pentium IV processor at a price much lower than normal for a new release by the firm. It also reduced prices on its other Pentium products by an unprecedented 40 percent. While the price cuts helped to bolster market share, they also reduced revenues. Another problem, according to BusinessWeek Online columnist Cliff Edwards, was that Intel's diversification efforts had not begun to pay off. "Intel's new businesses—everything from Web hosting to processors for phones—have reaped zilch in profits, with losses doubling every year since 1998." Although some analysts recommended that Intel abandon many of its diversification efforts—particularly in the Web hosting industry, which saw major players like Exodus Communications bail out in the wake of the dot-com shakedown—the firm decided to forge ahead, hoping to be well positioned for the industry's eventual rebound.