Intel Inside The Net?

It's pouring resources into I-way strategies

Intel Corp. CEO Andrew S. Grove has eyed the rise of the Internet with a mixture of delight and paranoia. With millions of consumers and businesses going on the Net, demand for computers (and the Intel microprocessors that go in them) would surely get a boost, he figured. And, indeed, that has happened. In the latest quarter, for example, surprisingly strong PC sales helped Intel beat Wall Street's earnings estimates by 18%.

Yet Grove has seen another, grimmer possibility: Because Internet computing does not actually require the latest Intel chip or Microsoft Corp. operating software, PC buyers might stop trading up to new Intel technology every two or three years. Or worse, they might abandon so-called Wintel machines (those running Microsoft Windows and using Intel chips).

GANG OF RIVALS. That could be Intel's undoing. The company relies on constant upgrades to fund development of cutting-edge chips--which deliver fat profits and are hard for competitors to clone. But the upgrade scenario only works if consumers think they need the next Wintel box for the next big computer thing. "Our deal with consumers is that they're willing to pay $2,000 for a PC if we're able to continue delivering waves of excitement," says Grove.

For a year, a gang of Wintel rivals, led by Oracle Corp. and Sun Microsystems Inc., has been promising that it would supply the next wave of excitement. Their vehicle, the stripped-down network computer (NC), doesn't use an Intel chip or Windows but excels at cruising the World Wide Web. On Oct. 28, the eve of Sun's JavaStation NC debut, Grove and Microsoft Chairman William H. Gates announced that, despite a year of deriding the NC, they plan their own Internet computer, the NetPC.

Have Grove (and partner Gates) thrown in the towel? Will the dominance of Wintel PCs come to an end? Don't count on it. The NetPC is only a tiny part of the chipmaker's Internet strategy--and one carefully calibrated to steal the thunder of the NC crowd without threatening Intel's core PC business. No, Grove has much bigger plans for the Net--plans that, if they succeed, will preserve the Wintel dynasty for years to come.

Grove has quietly rallied his engineers to develop a dizzying array of multimedia and Internet technology aimed at keeping the PC the Net vehicle of choice. Intel has pumped $70 million into Internet startups, $35 million this year alone. And he has Intel marketers working with independent developers to create snazzy Net programs and content for Wintel PCs.

The software effort is critical. Fetching simple documents from the Internet doesn't use much horsepower--a cheap NC could do the job easily. But the applications that Intel is pushing, such as videoconferencing, Internet telephony, and 3-D virtual worlds, soak up the power of speedy Pentium processors--and push buyers to upgrade. "Everything they do is focused on that," says Cowen & Co. analyst Drew Peck.

Headquarters for the chipmaker's Internet effort is at the Intel Architecture Labs in Hillsboro, Ore., near Portland. There, in three low-rise office buildings called Jones Farm, hundreds of engineers are writing software for everything from Internet video to threedimensional sound. At a nearby multimedia studio, Intel offers production facilities for Hollywood studios and media conglomerates to produce interactive programming. Intel also has 60 Internet "evangelists" encouraging developers to write Web-ware for Intel PCs. "They're sure doing a lot of stuff," says Microsoft's Gates, who has presided over his company's own massive efforts to make sure that Wintel machines prevail on the Net. "...They've become much more involved."

The company is even working with "end users"--customers that never deal with Intel but buy computers using Intel chips. With True Value Hardware, Intel is working on online shopping. Giant Step Productions, a unit of ad agency Leo Burnett Co., is using Intel's labs to help Hallmark Cards Inc. develop Net-based greetings. These expensive handholding efforts are an investment in the future, says Grove: "We're not doing this pro bono. It's market development."

Meanwhile, Intel is backing dozens of Internet software and content start- ups. Its $70 million investment over the past several years places Intel among the top 10 venture investors in Silicon Valley, according to Softletter, an industry newsletter. Among Intel's holdings are stakes in electronic commerce pioneer CyberCash, Web publisher C/Net, and The Palace, a virtual-world Web site.

The Internet push is also influencing chip designs. A technology called MMX (for multimedia extension) that helps a PC fly through 3-D animation and live video will be included in new versions of the Pentium and Pentium Pro, due in early 1997. MMX is a vital part of Intel's Internet strategy because it will help draw multimedia programs to the PC.

MMX, like much of Intel's Net effort, falls under a longstanding campaign by Grove to make Wintel PCs whizzes at multimedia communication. Efforts to develop hardware and software for PC telephony and videoconferencing have already consumed "hundreds of millions" of dollars, says Grove.

Now, the communications push is being focused on the Net. The three-year-old ProShare desktop videoconferencing software has been reworked for the Net. D. Craig Kinnie, director of Intel Architecture Labs, says it's likely that by mid-1997, every Pentium PC will be shipped with videoconferencing technology built in. And Intel is pushing Internet telephony in part by teaming up with Microsoft to push a standard called H.323, which lets you make voice calls across the Net. More than 120 companies have endorsed that standard, including the leader in Internet telephony, VocalTec. Replacing the dozen incompatible approaches now in use should help Internet phoning flourish.

SPEEDUP. Grove's big worry remains the lack of high-speed networks to deliver the multimedia programming to PCs. Because most consumers still can't get high-speed digital phone lines or cable modems, he's pushing "hybrid" applications that divide programs between the user's PC and remote computers. An electronic catalog, for example, would store big files such as color photos of merchandise on a CD-ROM. The data that change--prices or promotions--arrive over a modem. id Software is working with Intel on a hybrid version of its hit CD-ROM game Quake, which will use the Web for multi-user play.

There are also bids to speed up the Net itself. Intel is pushing a protocol for the Internet that would reduce traffic by sending data only to certain users. Another would allocate Net capacity for time-sensitive uses such as video.

With a setup called Intercast, Intel avoids the phone system entirely to send Internet data to PCs over TV frequencies. NBC, CNN, and QVC now transmit Web data along with some TV shows, letting viewers with Intercast technology retrieve information about what they're watching.

Will all these efforts be enough to ensure the survival of the Wintel PC--and Intel's chip empire? Grove is paranoid enough to hedge his bets. In addition to efforts aimed at driving demand for Wintel machines, he's quietly experimenting with non-PC Internet appliances--Net phones and handheld Web terminals. "It's an opportunity for us to sell more chips," says Grove. And keep the Intel money machine functioning smoothly into the 21st century.

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