What Does The Future Hold For Intel?

Everyone working in technology spends part of the time trying to predict the future. At Intel, it's a full-time job. "We develop technology for markets that don't exist for products that don't exist," Intel president and chief operating officer Paul Otellini says. "It's a daunting business."

And the crystal ball offers a cloudy picture. That's evident from Intel's missteps of the past and its vision of the future. "Ten years ago, we were in the computer business," says Craig Barrett, who's been Intel's chief executive since co-founder Andy Grove handed over the reins in 1998. "Today we're in kind of the Internet business. Ten years from today ... "

Barrett's voice trails off while he thinks about this one. "Ten years out, it could be health sciences," he says. The transistors that Intel makes today are already the size of DNA molecules or viruses. Doctors and researchers can start to think about coupling sensors, computers, and communication capabilities to diagnose and treat diseases on a molecular level. "I would guess in 10 years--a wild guess--that this could be as big to our industry as the PC is today."

Barrett spends a lot of time thinking about the future--and a lot of money trying to anticipate it.

Intel develops technology for markets and products that don't yet exist, chief operating officer Otellini saysPhoto by Angie Wyant Today, the world's largest semiconductor manufacturer drives near-term advances in computing and communications through a corporate culture that fosters innovation and rewards risk taking. The company's goal is to create a digital foundation that both businesses and consumers can benefit from. To accomplish that, Intel realized years ago it had to look beyond the chip. "Our view has evolved from, 'How do you build a faster microprocessor?' to, increasingly, looking at everything that goes around microprocessors," Otellini says.

Intel also is willing to change when the marketplace tells the company it has made a bad bet. Last week, Intel said it would start incorporating 64-bit capabilities into its 32-bit chips, rather than try to push customers to adopt its 64-bit Itanium microprocessor.

One reason Intel has been so successful is that it focuses on how computer systems are developed, rather than just on chips, says Nathan Brookwood, principal analyst for research firm Insight64. "They felt they needed to have more of a system view, and it has served them well," he says. "It's real tough these days to get people excited about gigahertz."

Intel is still focused on the business-computing market, as it tries to move mainstream computing into the 64-bit world (see story, The 64-Bit Bet: Itanium Chip Faces Slow Adoption). And it's expanding into markets overseas, where there's still room to sell new PCs. But those efforts aren't likely to produce the next big thing, the new technology and markets that will fuel the kind of growth Intel is used to. Last year, the company had a profit of $5.64 billion on revenue of $30.14 billion, up from a profit of $3.12 billion on revenue of $26.76 billion in 2002.

One can get a hint as to how Intel sees the future by looking at where it puts its money. Since 2001, Intel has spent $15.7 billion on new production facilities and IT for its 79,500 employees worldwide. One big hint: More than 80 of the company's sites, including a factory in Rio Rancho, N.M., have deployed wireless networks for internal use.Intel spends a lot on research. Since 2001, it has invested $12.2 billion in research and development. This year, it expects to spend $4.8 billion on R&D, up from 2003's $4.4 billion.

Intel plans to invest $200 million this year in emerging companies developing technologies to create networked homes that let people access music, photos, and other digital content. Last year, the company's Intel Capital investment arm handed out hundreds of millions of dollars to companies such as DRAM makers Micron Technology Inc. and Elpida Memory Inc. The fund also has invested in BridgeCo, a Swiss designer of low-cost chips for linking home devices, and Entropic Communications Inc., which designs chips for home-networking systems over standard coaxial cable. Another investment, Musicmatch Inc., sells software for recording, organizing, and playing music on digital devices.

Intel's most-far-reaching investments will let people do videoconferencing, play games, and even watch movies via their cell phones. The missing ingredient in these applications is processors that can send and receive large data files without sacrificing battery life. No small task. Tomorrow's cell phones will have to receive data 20 or more times faster than today's phones and do so at today's prices. Intel relishes the role of innovator and standards bearer. "What we're doing in the future is going to have an impact on a significant number of people," says Frank Spindler, a VP in Intel's corporate technology group.

Still, Intel is smart enough to understand that it can't succeed by itself. Which is why it provides comprehensive product road maps twice each year at its Developer's Forums to help equipment makers and software developers prepare the systems needed to distri- bute Intel's technology. "If those industry partners aren't ready to sell our technology, we can't move forward," Spindler says.

One area where Intel has exerted tremendous influence is in wireless computing. By adding wireless capabilities to notebook computers with its Centrino chipset, Intel gave consumers and businesses a new reason to buy. "Centrino represented an opportunity to drive a market," Otellini says.

The company is a firm believer that computing and communications infrastructures will continue to merge. This is the foundation of its Centrino initiative, which packages a low-power Pentium M chip with a chipset and 802.11-compatible wireless networking capabilities to make mobile computing easier. To spur Centrino's adoption, Intel invested in the wireless-hot-spot technology and certified hot-spots offered by service providers to make it easier for users to get online. When Centrino was launched a year ago, there were fewer than 4,000 hot-spots worldwide; research firm IDC last year predicted that number will grow to 118,000 by 2005.The belief in the integration of computing and communications is pervasive throughout Intel. "People, by definition, are mobile," says Anand Chandrasekher, VP and co-general manager of Intel's Mobile Platforms Group. "Technology adapts to how people work and live." As such, "all computing devices will communicate, and all communication devices will compute," Chandrasekher predicts.

Intel designed Centrino to enable mobile communications based upon things users care most about: performance, form factor, battery life, and connectivity. Most of what Intel did in 2003 focused on business users, but this year, the company will refresh Centrino to focus on consumers.

While Centrino technology is present in most new notebooks, other efforts haven't worked out as well. Businesses have been slow to adopt the 64-bit Itanium chip. And in December, Intel said it would take a $600 million fourth-quarter write-off related to its Wireless Communications and Computing Group. Formed largely from Intel's $1.6 billion purchase in 1999 of DSP Communications Inc., a supplier of chipsets, reference designs, software, and other technologies for wireless handsets, some of the wireless group's products took longer to develop than expected, which prevented Intel from getting the sales it wanted. A week after announcing the write-off, Intel folded that business into its Communications Group.

The wireless group's losses increased to $432 million in 2003 from $287 million a year earlier. But the Communications Group managed to cut its losses by nearly $200 million between 2002 and 2003, largely on the strength of the Centrino wireless networking technology. Sean Maloney, executive VP and general manager of the newly combined Communications Group, is confident that Intel can turn things around. "One hundred percent of the action is in the communications space today," he says. "That's where the technology challenges are, and Intel has been forced to take communications seriously."

Intel hopes wireless will follow the pattern of PC chips. Intel's ability to steadily increase the speed of chips led to PCs being able to handle more-complicated and -sophisticated applications, which made them the essential tool of knowledge workers around the world. So Intel is working with other vendors to increase the ability of Wi-Fi technology to handle faster data speeds. The WiMax Forum, which also includes AT&T and Fujitsu, is dedicated to creating global standards for broadband wireless products. But WiMax, which is expected to offer speeds of as much as 70 Mbps for distances of up to 31 miles, will be challenged in ways Wi-Fi wasn't."It's a killer technology, but it will have competition, obviously," says Barrett, citing high-speed data services over cable TV and DSL. However, WiMax is wireless, a key advantage for a mobile society. Adoption will come down to how it's priced and how long it takes to become a reliable service, Barrett says.

What Intel is really trying to do is sell more processors for home use--it's still a chip company, after all, says Kurt Scherf, VP and principal of market research firm Parks Associates. Demand for Intel's processors in the home will come from media-center PCs and other consumer electronics that interact with digital content. "Given the demand for PCs and multimedia in the home, it's critical for Intel to have a game plan," Scherf says. That game plan is different than it was a few years ago, when the company tried selling Intel-branded digital cameras and MP3 players. Intel now is doing what it does best: providing the building blocks to create a foundation for a new generation of technology. At January's International Consumer Electronics show in Las Vegas, Otellini unveiled a technology, code-named Cayley, that uses liquid crystal on silicon to create small chips, or microdisplays, that will improve the quality and lower the price of high-definition TVs. For example, Cayley uses advanced silicon manufacturing processes to produce a high-quality surface for reflecting light that creates an extremely bright display. "What we're good at is building state-of-the-art technology very efficiently in a way that lets it touch millions or billions of people," says Spindler, a 22-year Intel veteran.

Intel's $200 million investment fund accelerates the rollout of products that will use the company's processors while complementing its wireless initiative. The latest consumer electronics and wireless technologies typically hit the market with steep price tags. A network-connected DVD player can cost as much as four times the price of a standard player.

This works to Intel's advantage in a couple of ways. The company can either enjoy comfortable profit margins for the first 18 months after a product is introduced, or it can work with device manufacturers to cut prices and gain market share. Either way, consumer electronics and digital home technology are fertile markets for Intel. Shipments of network-capable consumer electronics, including set-top boxes, wireless DVD players, and televisions with embedded networking components, will reach 120 million units annually by the end of 2008, Parks Associates analyst Scherf says.

Barrett sees the danger of trying to squeeze high margins out of consumer electronics. "If you raise the price of the microprocessor, it raises the price to the end user, and it puts it out of the sweet spot in the market, and you don't sell the volume," he says. "So you don't have indiscriminate capability to go in and raise prices."Another edge Intel has is its ability to design integrated components. "With so many companies competing on price, [component makers] will be looking for integrated solutions where all sorts of applications are included on one board," Scherf says.

Consumer electronics will provide significant growth for the company that can provide the right technology. Whether that's Intel remains to be seen. In today's consumer-electronics market, buyers care less about what type of chips their televisions or DVD players have and more about picture quality and performance.

But don't expect to see Intel-branded consumer electronics or computers. Rather, "they will find new and creative ways to build new things out of silicon," says Steve Kleynhans, a VP at research firm Meta Group. Today, it's processors; tomorrow, the company will offer silicon-based sensors, radios, and nanotechnology, Kleynhans says.

Intel's mantra is to never stop thinking about new ways silicon can be used to improve technology. Spindler sees a day when Centrino's microprocessor, chipset, and wireless capabilities will be integrated onto a single chip. This makes sense, given that the more technology that's placed on a single piece of silicon, the easier it is to mass produce.

But that's building on today's technology. The real challenge for Intel remains peering into the future. "It's like when you play chess, the best players are thinking ahead five or six moves," says Mike Fister, senior VP and general manager of the Enterprise Platforms Group. "You have to look at the next logical evolution."It's a challenge that poses big risks and offers big rewards if the right moves are made. For a company like Intel that wants to continue to lead an industry, it has no choice but to keep trying to predict the future.